Capitalizing Repair Costs as Fixed Assets

Steps:

• Repairs are revenue expenditures that should be expensed in the income statement, reducing profit.
• Debiting to the office equipment account capitalizes the cost, adding it to non-current assets instead.
• This avoids recognizing the expense, overstating profit for the year.
• Assets remain overstated as the repair cost is not depreciated or removed.

Why A is correct:

• Per accounting principles (IAS 16), repairs are not capitalizable unless they extend asset life; here, expensing was skipped, inflating both profit and assets.

Why the others are wrong:

• B: Assets are overstated, not understated, from improper capitalization.
• C: Profit is overstated, not understated, due to missing expense.
• D: Profit and assets are both overstated, not understated.

Final answer: A