O Level Accounting (7707)•7707/11/M/J/22
Explanation
Incorrect capitalization of repair as asset Steps:
- Repair cost of $420 should be expensed, not added to equipment account.
- Adding 420 initially.
- Depreciation at 20% straight-line on 84 expense, reducing book value by $84.
- Net effect: book value overstated by 84 = $336.
Why B is correct:
- Straight-line depreciation formula (20% × 84) shows net overstatement of $336 after partial recovery via extra depreciation.
Why the others are wrong:
- A: Ignores depreciation adjustment, understating overstatement amount.
- C: Assumes no depreciation on repair, overstating full $420.
- D: Miscalculates total as if depreciation exceeded addition (420 = $504).
Final answer: B
Topic: Accounting for depreciation and disposal of non-current assets
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