Question

Wilkins food products incorporated acquired a packaging machine from lawrence specialists corporation. lawrence completed construction of the machine on january 1, 2022. in payment for the machine wilkins issued a three-year installment note to be paid in three equal payments at the end of each year. the payments include interest at the rate of 13%. lawrence made a conceptual error in preparing the amortization schedule, which wilkins failed to discover until 2024. as a result of the error, wilkins understated interest expense by $48,000 in 2022 and $43,000 in 2023.

1. Indicate in the table below which accounts are incorrect as a result of these errors at January 1, 2024 and whether those accounts are understated or overstated. (Ignore income taxes.)
A. Retained Earnings
B. intrest expense
C. amortization expense
D. cash notes payable

2. Prepare a journal entry to correct the error.

Answer 1

The accounts 'Interest Expense' is understated and 'Retained Earnings' is overstated due to the incorrect amortization schedule. A correcting journal entry would debit 'Interest Expense' and credit 'Retained Earnings' by the accumulated understated amount of $91,000.

Step-by-step explanation:

Wilkins Food Products Incorporated made an accounting error due to an incorrect amortization schedule prepared by Lawrence Specialists Corporation. As of January 1, 2024, certain accounts are affected by this error. Specifically, the accounts that are incorrect and their statuses are as follows:

• Interest Expense - Understated: The interest expense was understated by $48,000 in 2022 and by $43,000 in 2023.
• Retained Earnings - Overstated: Since the interest expense was understated, the net income would have been overstated, thus leading to an overstatement in retained earnings.
• Notes Payable - Correct: The principal value of the notes payable is not affected by the understatement of the interest expense.
• Amortization Expense - Not affected by the interest calculation and, therefore, remains correct.
• Cash - Correct: The cash payments would have been made correctly according to the terms of the note.

The corrected journal entry to record the accumulated understated interest expense would be:

• Debit Interest Expense $91,000
• Credit Retained Earnings $91,000
• This entry reflects the total interest that was understated over the two years ($48,000 + $43,000).