Misclassification of insurance as capital cost overstates profit Steps:

• Legal fees of $6000 relating to purchase are correctly capitalized as part of premises cost.
• Insurance of $700 for the financial year should be expensed immediately, not capitalized.
• By capitalizing insurance, the $700 expense is omitted from profit calculation.
• No depreciation is charged in year of purchase, so no offsetting effect; profit overstated by $700.

Not enough information: The calculated effect ($700 overstated) does not match any option, suggesting missing details like timing of purchase or different amounts.

Why B is correct: Not applicable; see above.

Why the others are wrong:

• A: No basis for $1300 understatement.
• C: Effect is overstatement, not understatement.
• D: No basis for $2000 overstatement.

Final answer: Not enough information.