Harkin Company purchased a building on a tract of land and allocated the entire cost of the purchase to building.Normally,it depreciates buildings over 20 years using the straight-line method with zero residual value and does not depreciate land.Because of its accounting treatment of the purchase,Harkin's income before taxes for the next 20 years will be
A)overstated.
B)understated.
C)unaffected.
D)in conformance with GAAP.

Question

Quizplus · Accepted Answer

Allocating the entire cost of the purchase to building and not depreciating the value of land will result in overstating the value of the company's assets. As a result, the company's income before taxes for the next 20 years will be understated. This violates the matching principle of accounting and does not conform to GAAP (Generally Accepted Accounting Principles).

Harkin Company Purchased a Building on a Tract of Land