Question

The before-tax income for Lonnie Holdiman Co. for 2020 was $101,000 and $77,400 for 2021. However, the accountant noted that the following errors had been made: 1. Sales for 2020 included amounts of $38,200 which had been received in cash during 2020, but for which the related products were delivered in 2021. Title did not pass to the purchaser until 2021. 2. The inventory on December 31, 2020, was understated by $8,640. 3. The bookkeeper in recording interest expense for both 2020 and 2021 on bonds payable made the following entry on an annual basis. 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, 2017, to yield an effective-interest rate of 7%. (Assume that the effective-yield method should be used.) 4. Ordinary repairs to equipment had been erroneously charged to the Equipment account during 2017 and 2018. Repairs in the amount of $8,500 in 2017 and $9,400 in 2018 were so charged. The company applies a rate of 10% to the balance in the Equipment account at the end of the year in its determination of depreciation charges.

Required:
Prepare a schedule showing the determination of corrected income before taxes for 2017 and 2018.

Answer 1

Lonnie Holdiman Co.

A Schedule showing the determination of the corrected income before taxes for 2020 and 2021:

2020 2021

Before-tax income $101,000 $77,400

1. Excess Sales revenue (38,200) 38,200

2. December 31, 2020 Inventory understated 8,640 (8,640)

3. Amortized bonds discount not expensed (1,776) (1,901)

4. Equipment repairs not expensed (8,500) (9,400)

5. Overstated depreciation from capitalized

Equipment repairs 850 940

Corrected income before taxes $62,014 $96,599

Step-by-step explanation:

a) Data and Calculations:

Before-tax income for 2020 = $101,000

Before-tax income for 2021 = $77,400

1. 2020 Sales Revenue $38,200; 2021 Sales Revenue $38,200

2. 2020 Understated inventory $8,640; 2021 Understated inventory $8,640

3. 2020 Unstated bonds interest expense $1,776

2021 Unstated bonds interest expense $1,901

4. 2020 Unstated equipment repairs $8,500 Overstated Equipment account $8,500

2021 Unstated equipment repairs $9,400 Overstated Equipment account $9,400

2020 Overstated Depreciation expense $850

2021 Overstated Depreciation expense $940.

Bonds Calculations:

Bonds outstanding value:

Bond's face value = $250,000

Discount = 15,000

Proceeds from bonds = $235,000

Bonds coupon payment = $15,000 ($250,000 * 6%)

Bonds Interest expense = $16,450 ($235,000 * 7%)

Amortized discount = $1,450

December 31, 2017:

Bonds coupon payment = $15,000 ($250,000 * 6%)

Bonds Interest expense = $16,450 ($235,000 * 7%)

Amortized discount = $1,450 ($16,450 - $15,000)

Outstanding value = $236,450 ($235,000 + 1,450)

December 31, 2018:

Bonds coupon payment = $15,000 ($250,000 * 6%)

Bonds Interest expense = $16,552 ($236,450 * 7%)

Amortized discount = $1,552 ($16,552 - $15,000)

Outstanding value = $238,002 ($236,450 + 1,552)

December 31, 2019:

Bonds coupon payment = $15,000 ($250,000 * 6%)

Bonds Interest expense = $16,660 ($238,002 * 7%)

Amortized discount = $1,660 ($16,660 - $15,000)

Outstanding value = $239,662 ($238,002 + 1,660)

December 31, 2020:

Bonds coupon payment = $15,000 ($250,000 * 6%)

Bonds Interest expense = $16,776 ($239,662 * 7%)

Amortized discount = $1,776 ($16,776 - $15,000)

Outstanding value = $241,438 ($239,662 + 1,776)

December 31, 2021:

Bonds coupon payment = $15,000 ($250,000 * 6%)

Bonds Interest expense = $16,901 ($241,438 * 7%)

Amortized discount = $1,901 ($16,901 - $15,000)

Outstanding value = $243,339 ($241,438 + 1,901)

Depreciation on Capitalized Equipment Repairs:

Excess depreciation expense:

2020 = $850 ($8,500 * 10%)

2021 = $940 ($9,400 * 10%)