Question

What is the effect on the financial statements of recording a $15,000 repair expense as a debit to Machinery and a credit to Cash?

Answer 1

The net income and assets for the year will be overstated by $15,000.

Step-by-step explanation:

A repair expense of $15,000 is a period cost that should be expensed in the period in which it is incurred and not carried forward to the next accounting period or capitalized. By capitalizing this repair expense, the net income and assets for the period are overstated. The concept of accrual is also not followed. Repair expense can only be capitalized when it adds to the value of an asset, which it does not possess before the repair. But ordinarily, repairs restore an asset to its former value and does not add to the value.