The
before-tax income for Luanne Hensall Corp. for 2010 was $101,000; for 2011, it
was $77,400. However, the accountant noted that the following errors had been
made:
1.
Sales for 2010 included $38,200 that had been received in cash during 2010, but
for which the related products were delivered in 2011. Title did not pass to
the purchaser until 2011.
2.
The inventory on December 31, 2010, was understated by $8,640.
3.
The bookkeeper, in recording interest expense for both 2010 and 2011 on bonds
payable, made the following entry each year:
Interest Expense ……………………………………………… 15,000
Cash…………………………………………………… 15,000
The
bonds have a face value of $250,000 and pay a stated interest rate of 6%. They
were issued at a discount of $15,000 on January 1, 2010, to yield an effective
interest rate of 7%. (Use the effective interest method.)
4.
Ordinary repairs to equipment had been charged in error to the Equipment
account during 2010 and 2011. In total, repairs in the amount of $8,500 in 2010
and $9,400 in 2011 were charged in this way. The company applies a rate of 10%
to the balance in the Equipment account at year end in determining its
depreciation charges. Assume that Luanne Hensall Corp. applies IFRS.
Instructions
(a)
Prepare a schedule showing the calculation of corrected income before taxes for
2010 and 2011.
(b)
Prepare the journal entries that the company’s accountant would prepare in
2011, assuming the errors are discovered while the 2011 books are still open.
Ignore income taxes.
(a)
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2010
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2011
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Income before tax
Corrections:
Sales
erroneously included in 2010
income
Understatement
of 2010 ending
inventory
Adjustment
to bond interest expense*
Repairs
erroneously charged to the
Equipment account
Depreciation
recorded on improperly
capitalized repairs (10%)***
Corrected income before tax
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$101,000
(38,200)
8,640
(1,450)
(8,500)
850
$62,340
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$77,400
38,200
(8,640)
(1,552)
(9,400)
1,790
$97,798
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* Bond interest expense for 2010 and 2011 was computed
as follows:
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Carrying
Amount of Bonds
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Stated
Interest
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Effective
Interest
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2010
2011
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$235,000
236,450
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$15,000
15,000
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**$16,450**
** 16,552**
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**$235,000 X 7%
Difference between effective interest at 7% and
stated interest (6%):
2010: $1,450
2011: 1,552
***Erroneous depreciation taken in 2011:
on 2010 addition ($8,500 ÷ 10) $ 850
on 2011 addition ($9,400 ÷ 10) 940
Total excess
depreciation 2011 $1,790
(b) 1. Retained Earnings................... 38,200
Sales........................... 38,200
2. Cost of Goods Sold (Income Summary).
8,640
Retained
Earnings............... 8,640
3. Retained Earnings................... 1,450
Bonds
Payable................... 1,450
For the
2010 interest.
Interest
Expense.................... 1,552
Bonds
Payable................... 1,552
For the
2011 interest.
4. Retained Earnings................... 8,500
Equipment....................... 8,500
Accumulated
Depreciation............ 850
Retained
Earnings............... 850
To
adjust the 2010 error on equipment.
Repair
Expense...................... 9,400
Equipment....................... 9,400
Accumulated
Depreciation............ 1,790
Deporeciation
Expense........... 1,790
To adjust
the 2011 error on equipment.
