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Chapter 22: Q20E. (page 1313)

The before-tax income for Lonnie Holdiman Co. for 2017 was \(101,000 and \)77,400 for 2018. However, the accountant noted that the following errors had been made:

1. Sales for 2017 included amounts of \(38,200 which had been received in cash during 2017, but for which the related products were delivered in 2018. Title did not pass to the purchaser until 2018.

2. The inventory on December 31, 2017, was understated by \)8,640.

3. The bookkeeper in recording interest expense for both 2017 and 2018 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.

Instructions

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

Short Answer

Expert verified

Depreciation is the allocation of the cost to its useful life, and corrected income before tax for 2017 is $62,340 and for 2018 is $96,949

Step by step solution

01

Definition of Depreciation

Depreciation is defined as the accounting process which allocates the cost of an asset to its estimated useful life.

02

Schedule showing corrected Income

2017 ($)

2018 ($)

Incorrect Income before tax

101,000

77,400

Unearned Revenue, earned in 2018

-38,200

38,200

Understated Inventory

8,640

-8,640

Short Interest Booked

-1,450

Short interest Booked

-1,551

Repairs Booked

-8,500

-9,400

Excess Depreciation

850

Excess Depreciation

940

Correct Income before tax

62,340

96,949

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Most popular questions from this chapter

On March 5, 2018, you were hired by Hemingway Inc., a closely held company, as a staff member of its newly created internal auditing department. While reviewing the company鈥檚 records for 2016 and 2017, you discover that no adjustments have yet been made for the following items. Items

1. Interest income of \(14,100 was not accrued at the end of 2016. It was recorded when received in February 2017.

2. A computer costing \)4,000 was expensed when purchased on July 1, 2016. It is expected to have a 4-year life with no salvage value. The company typically uses straight-line depreciation for all fixed assets.

3. Research and development costs of \(33,000 were incurred early in 2016. They were capitalized and were to be amortized over a 3-year period. Amortization of \)11,000 was recorded for 2016 and \(11,000 for 2017.

4. On January 2, 2016, Hemingway leased a building for 5 years at a monthly rental of \)8,000. On that date, the company paid the following amounts, which were expensed when paid. Security deposit \(20,000 First month鈥檚 rent 8,000 Last month鈥檚 rent 8,000 \)36,000

5. The company received \(36,000 from a customer at the beginning of 2016 for services that it is to perform evenly over a 3-year period beginning in 2016. None of the amount received was reported as unearned revenue at the end of 2016.

6. Merchandise inventory costing \)18,200 was in the warehouse at December 31, 2016, but was incorrectly omitted from the physical count at that date. The company uses the periodic inventory method.

Instructions

Indicate the effect of any errors on the net income figure reported on the income statement for the year ending December 31, 2016, and the retained earnings figure reported on the balance sheet at December 31, 2017. Assume all amounts are material, and ignore income tax effects. Using the following format, enter the appropriate dollar amounts in the appropriate columns. Consider each item independent of the other items. It is not necessary to total the columns on the grid.

Peter Henning Tool Company鈥檚 December 31 year-end financial statements contained the following errors.

December 31, 2017 December 31, 2018

Ending inventory \(9,600 understated \)8,100 overstated

Depreciation expense \(2,300 understated 鈥�

An insurance premium of \)66,000 was prepaid in 2017 covering the years 2017, 2018, and 2019. The entire amount was charged to expense in 2017.

In addition, on December 31, 2018, fully depreciated machinery was sold for $15,000 cash, but the entry was not recorded until 2019.

There were no other errors during 2017 or 2018, and no corrections have been made for any of the errors. (Ignore income tax considerations.)

Instructions

(a) Compute the total effect of the errors on 2018 net income.

(b) Compute the total effect of the errors on the amount of Henning鈥檚 working capital at December 31, 2018.

(c) Compute the total effect of the errors on the balance of Henning鈥檚 retained earnings at December 31, 2018.

At January 1, 2017, Beidler Company reported retained earnings of \(2,000,000. In 2017, Beidler discovered that 2016 depreciation expense was understated by \)400,000. In 2017, net income was \(900,000 and dividends declared were \)250,000. The tax rate is 40%. Prepare a 2017 retained earnings statement for Beidler Company

Discuss briefly the three approaches that have been suggested for reporting changes in accounting principles.

(Accounting for Accounting Changes and Errors) Listed below are various types of accounting changes and errors.

______ 1. Change in a plant asset鈥檚 salvage value.

______ 2. Change due to overstatement of inventory.

______ 3. Change from sum-of-the-years鈥�-digits to straight-line method of depreciation.

______ 4. Change from presenting unconsolidated to consolidated financial statements.

______ 5. Change from LIFO to FIFO inventory method.

______ 6. Change in the rate used to compute warranty costs.

______ 7. Change from an unacceptable accounting principle to an acceptable accounting principle.

______ 8. Change in a patent鈥檚 amortization period.

______ 9. Change from completed-contract to percentage-of-completion method on construction contracts.

______ 10. Change from FIFO to average-cost inventory method.

Instructions For each change or error, indicate how it would be accounted for using the following code letters:

(a) Accounted for prospectively.

(b) Accounted for retrospectively.

(c) Neither of the above.
See all solutions

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