Tuna Co. purchased a building in 2009 for $650,000 and debited an asset called "Buildings" for the entire amount. The company never depreciated the building although it had a useful life of 15 years. This action will cause:
A) Net income to be understated.
B) Net income to be overstated.
C) Net income will not be affected.
D) Total assets will be understated.

Question

Quizplus · Accepted Answer

Since the company did not depreciate the building over its useful life, the asset "Buildings" is overstated on the balance sheet. As a result, the company's net income will be overstated since the cost of the building is not being allocated over its useful life through depreciation expense.

Tuna Co Purchased a Building in 2009 for $650,000 and Debited