Question

A company replaced tires on a vehicle and debited the amount to Vehicle instead of Repairs and Maintenance Expense. Which of the following would occur because of this error?

A. Expenses would be understated.

B. Retained Earnings would be understated.

C. Assets would be understated.

D. Net income would be understated.

Answer 1

When a company debits the amount of replacing tires to the Vehicle account instead of the Repairs and Maintenance Expense account, it causes expenses and assets to be understated, but does not directly impact retained earnings or net income.

Step-by-step explanation:

When a company debits the amount of replacing tires to the Vehicle account instead of the Repairs and Maintenance Expense account, it affects the company's financial statements. The error causes the Expenses to be understated because the amount spent on replacing tires is not reflected correctly. This error also leads to Assets being understated because the cost of the new tires is not recognized as an increase in the value of the vehicle. However, it does not impact the Retained Earnings or the Net Income directly.