Floors 4 U uses straight-line depreciation for its equipment. The company purchased equipment for $250,000 and estimated its useful life at 8 years. The bookkeeper failed to consider the residual value of $25,000. What is the impact on earnings per share and operating income of failing to consider the residual value?
A)Earnings per share will be overstated and operating income will be understated.
B)Earnings per share will be understated and operating income will be overstated.
C)Both earnings per share and operating income will be overstated.
D)Both earnings per share and operating income will be understated.

Question

Quizplus · Accepted Answer

By not considering the residual value, depreciation expense is overstated each year, which leads to understating both operating income and earnings per share.

Floors 4 U Uses Straight-Line Depreciation for Its Equipment