Which statement best describes the effect on net income when maintenance is expensed as incurred and capital expenditures are capitalized and depreciated?

• A. Maintenance reduces net income in the current period; capitalized expenditures do not affect net income until depreciation.
• B. Maintenance has no effect on net income; capitalized expenditures reduce it immediately.
• C. Both maintenance and capital expenditures reduce net income in the same period.
• D. Maintenance reduces net income in the current period; capital expenditures reduce it immediately.

Answer: (A)

This tests how costs are recognized based on whether they maintain current operations or add to long-term assets. Maintenance costs are ordinary repairs that keep an asset working but don’t extend its life; they’re expensed in the period incurred, so net income drops now. Capital expenditures, on the other hand, are investments that add value or extend the asset’s life; they’re recorded as an asset and then depreciated over the asset’s useful life. Depreciation reduces net income each period, but it does not reduce it all at once when the expenditure occurs. So maintenance lowers net income in the current period, while capitalized expenditures don’t affect net income immediately but reduce it via depreciation in future periods.