Question

In 2017, We-Non-Cha Woodworking Ltd. (We-Non-Cha) purchased and installed a new state of-the-art lathe line in its woodworking shop in British Columbia. The new lathe line cost $1,750,000 to purchase and install, all of which was capitalized. The line is being depreciated on a declining balance basis at 20 percent per year. We-Non-Cha used its own employees to install the line. Because of errors made by We-Non-Cha's employees, it was necessary to remove parts of the lathe line after they were already installed to reinforce the building to meet safety standards. The extra work added $200,000 to the cost of the lathe line and is included in the $1,750,000 cost.

Required:
a. How should the cost of the extra work have been accounted for? Explain.
b. What would be the effect of capitalizing the cost of the extra work instead of expensing it on net income and total assets (amount and direction of the error) in 2017, 2018, and 2019? Explain your reasoning.
c. What would be the effect of capitalizing the cost of the extra work instead of expensing it on the cash flow statement in each of years 2017 through 2019?
d. Assuming the effect is material, what would be the implications of capitalizing the cost of the extra work instead of expensing it for users of the financial statements? Explain.



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  • CreatedFebruary 26, 2015
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