Capitalization error leads to excess expensing vs. depreciation Steps:

• Add installation to asset cost: $60,000 +$10,000 = $70,000 total cost.
• Calculate correct depreciation: 20% × $70,000 =$14,000 expense for the year.
• For error: Installation expensed at $10,000 + depreciation on$60,000 = 20% × $60,000 =$12,000; total expenses $22,000.
• Net effect: Error adds $22,000 -$14,000 = $8,000 extra expense, understating profit by$8,000.

Why C is correct:

• Installation costs must be capitalized under accounting principles (IAS 16), so only 20% ($2,000) should be depreciated in year 1, but error expenses full$10,000, creating $8,000 excess deduction.

Why the others are wrong:

• A: Error increases expenses, understating (not overstating) profit.
• B: $12,000 reflects depreciation on purchase cost only, ignoring installation's depreciation savings.
• D: $12,000 overstates the understatement; correct net is$10,000 expensed minus 8,000.

Final answer: C