Scenario: Your company purchased equipment in January of Year 5 for $2,000,000. The equipment had an estimated useful life of 10 years. Now, in Year 10, the company has spent an additional $1,000,000 on the equipment. $400,000 of this total was for ordinary repairs to fix things to maintain the equipments normal operating condition. However, the other $600,000 was for extraordinary repairs, which consisted of replacing the original engine so that the useful life of the entire equipment was extended an additional five years. Company management decided to "capitalize" the entire $1,000,000.

Write a memo around two paragraphs in length to your supervisor that explains the following:

The accounting error that was made

The effect, if uncorrected, this error will have on the company's financial statements this year

The problems that might result for those using the financial statements to make decisions

The accounting entry needed in Year 10 to fix the error