Reference no: EM131917973

Instructions: Assume that WorldCom paid $7,000 million rental fees to other phone companies in cash at the beginning of Year 1. Instead of correctly debiting the Rental Expense account (i.e. as a revenue expenditure), WorldCom debited $7,000 million to the "Equipment" account (i.e. as a capital expenditure). And, assume that WorldCom depreciated its long-lived assets such as equipment using the straight-line method over 10 years without salvage value. Explain (using numbers in millions) how would this recording "delay expense recognition to future periods and thus boost net income for Year 1". (Ignore tax as tax rules are different from financial accounting rules.) And, Besides net income in the income statement, total assets in the balance sheet would also be wrong. Indicate how would total assets at the end of Year 1 be wrong ("overstated" or "understated") and by how much (in millions of dollars). (Hint: Writing out the related entries for "acquisition" and "depreciation" might help.)