If a company capitalizes a cost that should have been expensed:
A)expenses and net income will be overstated in the year of the error.
B)expenses and net income will be understated in the year of the error.
C)expenses will be overstated and net income will be understated in the year of the error.
D)expenses will be understated and net income will be overstated in the year of the error.

Question

Quizplus · Accepted Answer

Capitalizing a cost that should have been expensed means that instead of recording the cost as an expense in the current period, it is recorded as an asset and then gradually expensed over time through depreciation or amortization. Therefore, in the year of the error, expenses will be understated because the cost should have been expensed but was not, and net income will be overstated because the cost was capitalized and added to assets instead of being expensed.

If a Company Capitalizes a Cost That Should Have Been