PRC-1 · Chapter 6 · Question 64 of 100
A company constructed a building for Rs. 800,000. An accountant mistakenly capitalized an additional Rs. 25,000 opening ceremony expense. Depreciation was 5% on Rs. 825,000. What is the combined impact on the company's recorded assets and profit?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Assets overstated by Rs. 23,750; Profit overstated by Rs. 23,750
Explanation
The 25,000 should be expensed. By capitalizing it, gross assets are +25k. But 5% depr on this 25k (1,250) was charged, meaning net assets are overstated by 23,750 (25k - 1.25k). Profit is overstated because 25,000 wasn't expensed, but an extra 1,250 depr was, netting to a 23,750 overstatement in profit.
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