The cost of replacing the engine on a motor vehicle, which increased the vehicles' useful life by five years, was charged as an expense rather than being capitalised and added to the carrying amount of the vehicle. This error would result in profit being:

Question

Quizplus · Accepted Answer

When the cost of replacing the engine is charged as an expense rather than being capitalized, it results in understated fixed assets, as the cost of replacing the engine should have been added to the carrying amount of the vehicle. Moreover, as the expense is charged immediately, it would result in understated equity. Since the profit would be reduced by the amount of the cost that should have been capitalized, the profit would also be understated. Therefore, D is the correct answer.

The Cost of Replacing the Engine on a Motor Vehicle