Capitalizing Repairs Overstates Assets and Profit

Steps:

• Repairs should be debited to an expense account, reducing profit.
• Instead, the cost was debited to the office equipment asset account, increasing the asset balance.
• No expense was recorded, so net profit is higher than it should be.
• Balance sheet shows overstated assets; income statement shows overstated profit.

Why A is correct:

• Under accrual accounting, repairs are period expenses, not capitalizable; treating them as assets violates the matching principle, overstating both non-current assets and net income.

Why the others are wrong:

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

Final answer: A