Analyze and correct accounting errors related to long-term assets.
Due to an umpire strike early in 2006, Umpire's Empire had some trouble with its informa tion processing and some errors were made in accounting for certain transactions. Evaluate the following independent situations that occurred during the year :
a. At the beginning of 2006, a building and land were purchased together for $100,000. Even though the appraisers determined that 90% of the price should be allocated to the building, Umpire's decided to allocate the entire purchase price to the building. The building is being depreciated using the straight-line method over 40 years, with an estimated salvage value of $10,000.
b. During the year, Umpire did some R&D on a new gadget to keep track of balls and strikes. The R&D cost $20,000, and Umpire capitalized it. The company intends to write it off over 5 years, using straight-line depreciation with no salvage value.
c. Near the beginning of the year, Umpire spent $10,000 on routine maintenance for its equipment, and the accountant decided to capitalize these costs as part of the equipment. (Equipment is depreciated over 5 years with no salvage value.)
d. Umpire spent $5,000 to extend the useful life of some of its equipment. The accountant capitalized the cost.
Required
a. For each, describe the error made and list the effect, if any, that the uncorrected error would have on the following items for Umpire's 2006 financial statements: net income, long-term assets, and retained earnings. If there is no error, simply write NIA next to the item.
b. Describe the adjustments that would correct the company's accounting records and make the 2006 financial statements accurate. If there is no error, write NIA next to the item.