Woods Company made an ordinary repair to a delivery truck at a cost of $500. Woods' accountant debited the asset account, Equipment. Was this treatment an error, and if so, what will be the effect on the financial statements of Woods?

Question

Quizplus · Accepted Answer

When an ordinary repair is made, it should be expensed in the current period as a maintenance expense, instead of being capitalized as an asset. Capitalizing the repair overstates the assets and net income on the current financial statements. Therefore, the correct treatment would have been to debit a maintenance expense account instead of the Equipment account. This error will decrease the net income and assets in subsequent periods as depreciation expense will be understated due to the overcapitalization of the repair.

Woods Company Made an Ordinary Repair to a Delivery Truck