Reference no: EM133055018

Question - Scenario - Your company purchased some expensive, sophisticated equipment in January of Year 5. The cost was $2,000,000 and the equipment was expected to have a useful life of 10 years. Now, in Year 6, the company has spent an additional $1,000,000 on the same equipment. $400,000 of this total was on ordinary repairs to fix things in order to maintain expected operating condition. However, the other $600,000 was spent on extraordinary repairs, which consisted of replacing the original engine so that the useful life of the entire equipment will be extended another five years. Company management was to "capitalize" the entire $1,000,000.

1: What is the exact accounting error that has been made?

My understanding is that the following has been impacted:

1- expenses will be understated

2- depreciation will be over stated

3- the Asset will also be overstated.

How can this error be fixed? In order to correct the mistake the company would need to label the Ordinary Repair as revenue and show it as a statement of profit correct?

How does this impact the assets and how should the depreciation be calculated?