P4-51B. (Learning Objectives 2, 5: Understanding materiality, correction of prior period profits)

In December 20X8, just before the financial statements were finalized, Kit & Kat discovered that a programming error in the calculation of depreciation of specialized, expensive machinery had caused the annual depreciation charge to be erroneously calculated. The error started from the date the machinery was purchased on January 1, 20X2. The error resulted in a lower depreciation of €100,000 per year. Due to a large dividend payment in the previous year, Kit & Kat’s total equity balance stands at €1,000,000 at the end of 20X8.

Requirements In your opinion, is this error material or not material? Why? How should this be rectified in the 20X8 financial statements, if needed?