Instructions:

Assume that WorldCom paid $7,000 million (i.e. $7 billion or $7,000,000,000) rental fees to other phone companies in cash at the beginning of Year 1. Instead of correctly debiting the ‘Rent 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. Use numbers in millions (i.e. do NOT write $7,000,000,000 with nine zeros) to:

Explain how would recording the $7,000 million to the Equipment account “delay expense recognition to future periodS” and thus “boost net income for Year 1.”