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.

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

• The accounting error that has been made
• The effect this error will have on the company's financial statements this year
• The problems that might result
• The importance of fixing the error and what needs to be done to fix the error