In 2011, Zumbro Ltd. (Zumbro) purchased a forklift for $28,000. In error, Zumbro’s bookkeeper recorded the purchase as an expense rather than classifying it as an asset. The error went unnoticed until late in 2014, when the forklift was sold for $6,000 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 forklift.
Show the entry that should have been made.

b. Zumbro uses straight-line depreciation for its vehicles and the useful life assigned to forklifts is five years with a $5,000 residual value. What would have been the effect of the error on net income and total assets (amount and direction of the error) in 2011, 2012, and 2013?

c. What would be the effect of the error on net income and total assets (amount and direction of the error) in 2014, the year the forklift was sold?

d. What would be the effect of the error on the cash flow statement in each of years 2011 through 2014?

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