Sifton Financial Ltd. (Sifton) is a small financial institution operating in western Canada.

In 2014, Sifton purchased a new computer system for its head office for $1,120,000

(including installation), all of which was capitalized. The system is being depreciated on a declining balance basis at 25 percent per year. Because of errors made by Sifton’s management, significant changes had to be made to the wiring in the building and to the special room housing the system. The extra work added $275,000 to the cost of the system and is included in the $1,120,000 cost.

Required:

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

b. What would be the effect of capitalizing the cost of the extra work instead of expensing it on net income and total assets (amount and direction of the error) in 2014, 2015, and 2016? Explain your reasoning.

c. What would be the effect of capitalizing the cost of the extra work instead of expensing it on the cash flow statement in each of years 2014 through 2016?

d. Assuming the effect is material, what would be the implications of capitalizing the cost of the extra work instead of expensing it for users of the financial statements?

Explain.