Question

Miss Hap, the company bookkeeper, recorded the annual repair costs on the company's machinery as an increase to the machinery account. As a result, which of the following is true? (Check all that apply)

a.Expenses will be overstated
b.Stockholders' equity will be overstated
c.Assets will be overstated.
d.Liabilities will be overstated

Answer 1

Recording the repair costs as an increase to the machinery assets instead of an expense overstates both assets and stockholders' equity. The expenses will be understated, while liabilities remain unaffected by this particular error.

Step-by-step explanation:

If Miss Hap, the company bookkeeper, recorded the annual repair costs on the company's machinery as an increase to the machinery account, the following would be true:

• Assets will be overstated because repair costs should reduce net income and not be added to the machinery account.
• Stockholders' equity will be overstated because expenses are lower than they should be, which overstates net income and, subsequently, retained earnings.
• Expenses will be understated, as repair costs should be recorded as an expense in the period in which they are incurred, not capitalized.
• Liabilities will not be directly affected by this error unless there is a deferred payment for the repairs, which has not been specified.

Thus, the correct answers are (b) Stockholders' equity will be overstated and (c) Assets will be overstated.