Question

Wilson Company reports the following expenditures related to plant assets for the most recent fiscal year:

Replacing worn-out machine gears $1,125
Routine vehicle maintenance $ 875
Replacement engine for delivery van $2,600
Expansion of production facility $84,500
Painting of office building $1,800
Installation of heating system $6,200

Wilson's accountant records all expenditures as capital expenditures: As a result, net income will be____

A. understated by $10,000
B. understated by $93,300
c. overstated by $3,800
d. overstated by $81,575

Answer 1

The net income will be overstated by $81,575.

Step-by-step explanation:

Wilson Company's accountant records all expenditures related to plant assets as capital expenditures. Capital expenditures are costs that are incurred to acquire, improve, or maintain long-term assets, such as machinery, vehicles, and buildings. These costs are not expensed immediately but are recorded as assets on the balance sheet and gradually depreciated or amortized over their useful lives.

Since all the expenditures listed in the question are recorded as capital expenditures, they are not immediately expensed and therefore do not affect the net income directly. Instead, they are reflected in the balance sheet and affect the net income indirectly through depreciation or amortization expenses.

Therefore, the correct answer is option D: overstated by $81,575.

Answer 2

Net income will be A. understated by $10,000 because the capital expenditures are not considered as expenses deducted from revenue to calculate net income.

Step-by-step explanation:

Net income will be understated by $10,000. The reason for this is that capital expenditures such as replacing worn-out machine gears, routine vehicle maintenance, and expansion of production facilities are not considered expenses that should be deducted from the revenue to calculate net income. Instead, these expenditures are capitalized and added to the cost of plant assets.

By recording these expenditures as capital expenditures, Wilson's accountant is treating them as an increase in the value of the plant assets rather than as expenses. As a result, net income will be understated because these costs are not being deducted from revenue to determine net income.