Expensing the Cost of a Pencil Holder That Cost $1

question 9

Multiple Choice

Expensing the cost of a pencil holder that cost $1.25 instead of capitalizing it as a plant asset and depreciating it over its estimated useful life of 10 years:

• A)violates the economic entity assumption.
• B)violates GAAP since pencil holders are important assets.
• C)is justified because of materiality.
• D)is appropriate because of the stable dollar assumption.

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Definitions:

Debt-to-Equity Ratios

A financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets.

Capital Structures

The particular combination of debt and equity used by firms to finance their overall operations and growth.

Recapitalization

The process of restructuring a company's capital structure by exchanging one form of financing for another, such as debt for equity.

Cost of Equity

The return that investors expect for investing in a company's equity, reflecting the risk compared to risk-free assets.