(Effect of a recording error on the financial statements, LO 2, 3, 8, 9) In 2001 Zumbro Ltd. (Zumbro) purchased a large delivery truck for $72,000. In error, Zumbro’s bookkeeper recorded the purchase as an expense rather than capitalizing the cost and recording it on the balance sheet as an asset. The error went unnoticed until late in 2004, when the truck was sold for $12,000 and no record could be found of it in the accounts.

Required:

a. Show the entry that Zumbro’s bookkeeper made to record the purchase of the truck. Show the entry that the bookkeeper should have made.

b. Zumbro uses the straight-line method for amortizing its vehicles and the useful life assigned to similar vehicles in the past has been five years. What would be the effect of the error on net income and total assets (amount and direction of the error) in 2001, 2002, and 2003?

c. What would be the effect of the error on net income and total assets (amount and direction of the error) in 2004, the year the truck was sold?

d. What would be the effect of the error on the cash flow statement in each of years 2001 through 2004?

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