Misclassification Reverses Expense Adjustment

Steps:

• Correct accrual treatment adds $375 to electricity expense in the income statement.
• Treating it as prepayment subtracts $375 from electricity expense.
• The error reverses the adjustment: -375 instead of +375, understating expenses by $750 total.
• Understated expenses overstate profit by $750.

Why B is correct:

• Reversing the accrual adjustment (add vs. subtract) doubles the error to $750, overstating profit per matching principle.

Why the others are wrong:

• A: Ignores reversal; only considers single $375 impact.
• C: Wrong direction; error overstates, not understates, profit.
• D: Wrong direction; profit is overstated, not understated.

Final answer: B