(Effect of a recording error on the financial statements, LO 2, 3, 8, 9) In 2004 WeNon-Cha Forest Products Ltd. (We-Non-Cha) purchased and installed a new stateof-the-art lathe line in its lumber manufacturing facility in British Columbia. The new lathe line cost $7,000,000 to purchase and install, all of which was capitalized.

The line is being amortized on a declining balance basis at 20% per year. We-NonCha used its own employees to install the line. Because of errors made by We-NonCha’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 $800,000 to the cost of the lathe line and is included in the $7,000,000 cost.

Required:

a. How should the cost of the extra work have been accounted for? Explain.

b. What would be the effect of the error on net income and total assets (amount and direction of the error) in 2004, 2005, and 2006? Explain your reasoning.

c. What would be the effect of the error on the cash flow statement in each of years 2004 through 2006?

d. Assuming the error is material, what would the implications of this error be for users of the financial statements? Explain.