INTERMEDIATE ACCOUNTING
INTERMEDIATE ACCOUNTING
8th Edition
ISBN: 9780078025839
Author: J. David Spiceland
Publisher: McGraw-Hill Education
Question
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Chapter 20, Problem 20.22E
To determine

Error correction:

Error correction is an adjustment to previously issued financial statements. It is not considered as an accounting change.

To Journalize: Entry necessary to correct the error, and adjusting entry for the year 2016

Expert Solution & Answer
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Explanation of Solution

 Journal Entry to correct the error

Date Account Title and Explanation Debit Amount($) Credit Amount($)
  Retained earnings 61,000  
        Interest expense (1)   61,000
  (To record error found before adjustment)    

Table (1)

  • Retained earnings are component of shareholders’ equity. There is a decrease in the value of shareholders’ equity. Therefore, it is debited.
  • Interest expense is a liability. There is an increase in liability value. Therefore, it is credited.

 Adjusting entry for the year 2016

Date Account Title and Explanation Debit Amount($) Credit Amount($)
  Interest expense (1) 61,000  
          Discount on bonds payable(2) 1,000
          Interest payable(3)    60,000
  (To record error discovered before adjustment)    

Table (2)

  • Interest expense is a liability. There is a decrease in liability value. Therefore, it is debited.
  • Discount on bonds payable and notes payable are liability. There is an increase in liability value. Therefore, it is credited.
  • Interest payable is a liability which is increased; hence credit the interest payable.

Journal entries that should have been recorded:

 Adjusting entry for the year 2015

Date Account Title and Explanation Debit Amount($) Credit Amount($)
  Interest expense(1) 61,000  
  Discount on bonds payable(2) 1,000
          Interest  payable(3)   60,000
  (To record error discovered before adjustment)    

Table (3)

  • Interest expense is a liability. There is a decrease in liability value. Therefore, it is debited.
  • Discount on bonds payable and notes payable are liability. There is an increase in liability value. Therefore, it is credited.
  • Interest payable is a liability which is increased; hence credit the interest payable.

 Journal Entry for the year 2016

 

Date

Account Title and Explanation Debit Amount($) Credit Amount($)
  Interest expense(4) 12,200  
  Interest payable(3) 60,000  
         Discount on bonds payable(5)   200
         Cash(Given)   72,000
  (To record the correct entry)    

Table (4)

  • Interest expense is a liability. There is a decrease in liability value. Therefore, it is debited.
  • Interest payable is a liability which is decreased; hence debit the interest payable.
  • Discount on bonds payable is a liability which is increased; hence credit the discount on bonds payable.
  • Cash is being paid, cash is an asset which is being decreased; hence credit the cash account.

Working notes:

a. Calculate the interest expense for the year 2015

Interest expense=Cash×(Number of months completedInterest period )=$72,000×(5months6 months)=$72,000×0.833333=$61,000. (1)

b. Calculate discount on bonds payable for the year 2015

(Discountonbondaftercorrection)=(Discountonbondbeforecorrection)×(Numberofmonthscompletedinterestpayable)=$1,200×(5months6months)=$1,200×0.833333=$1,000. (2)

c. Calculate the interest payable for both the years of 2015 and 2016

Interestpayable=cash×(NumberofmonthscompletedInterestperiod)=$72,000×(5months6months)=$72,000×0.833333=$60,000. (3)

d. Calculate the interest expense for the year 2016 up to February 1.

(Interestexpenseaftercorrection)=(Interestexpensebeforecorrection)×(Number of months completedInterest period )=$73,200×(1month6months)=$73,200×0.16666=$12,200. (4)

e. Calculate the discount on bonds payable for the year 2016 up to February 1.

(Discountonbondaftercorrection)=(Discountonbondbeforecorrection)×(Numberofmonthscompletedinterestperiod)=$1,200×(1month6months)=$1,200×0.16666=$200. (5)

Interest expenses of 2016 are overstated by recording extra interest in the month of February. Likewise, retained earnings are overstated by the exact amount as the interest expense of 2015 was understated when the accrued interest was not reported.

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Chapter 20 Solutions

INTERMEDIATE ACCOUNTING

Ch. 20 - Prob. 20.11QCh. 20 - Describe the process of correcting an error when...Ch. 20 - Prob. 20.13QCh. 20 - If it is discovered that an extraordinary repair...Ch. 20 - Prob. 20.15QCh. 20 - Prob. 20.16QCh. 20 - Prob. 20.17QCh. 20 - BE 20–1 Change in inventory methods LO20–2 In...Ch. 20 - Prob. 20.2BECh. 20 - Prob. 20.3BECh. 20 - Prob. 20.4BECh. 20 - Prob. 20.5BECh. 20 - Prob. 20.6BECh. 20 - Prob. 20.7BECh. 20 - Prob. 20.8BECh. 20 - Prob. 20.9BECh. 20 - Prob. 20.10BECh. 20 - Prob. 20.11BECh. 20 - Prob. 20.12BECh. 20 - Prob. 20.1ECh. 20 - Prob. 20.2ECh. 20 - Prob. 20.3ECh. 20 - Prob. 20.4ECh. 20 - Prob. 20.5ECh. 20 - FASB codification research LO202 Access the FASB...Ch. 20 - Prob. 20.7ECh. 20 - Prob. 20.8ECh. 20 - Prob. 20.9ECh. 20 - Prob. 20.10ECh. 20 - Prob. 20.11ECh. 20 - Prob. 20.12ECh. 20 - Prob. 20.13ECh. 20 - Prob. 20.14ECh. 20 - Prob. 20.15ECh. 20 - Prob. 20.16ECh. 20 - Prob. 20.17ECh. 20 - Classifying accounting changes LO201 through...Ch. 20 - Prob. 20.19ECh. 20 - Prob. 20.20ECh. 20 - Prob. 20.21ECh. 20 - Prob. 20.22ECh. 20 - Prob. 20.23ECh. 20 - Prob. 20.24ECh. 20 - Classifying accounting changes and errors LO201...Ch. 20 - Prob. 1CPACh. 20 - Prob. 2CPACh. 20 - Prob. 3CPACh. 20 - Prob. 4CPACh. 20 - Prob. 5CPACh. 20 - Prob. 6CPACh. 20 - Prob. 7CPACh. 20 - Prob. 8CPACh. 20 - Prob. 9CPACh. 20 - Prob. 10CPACh. 20 - Prob. 11CPACh. 20 - Prob. 12CPACh. 20 - Prob. 13CPACh. 20 - Prob. 14CPACh. 20 - Prob. 15CPACh. 20 - Prob. 1CMACh. 20 - Prob. 2CMACh. 20 - Prob. 3CMACh. 20 - Prob. 20.1PCh. 20 - Prob. 20.2PCh. 20 - Prob. 20.3PCh. 20 - Prob. 20.4PCh. 20 - Prob. 20.5PCh. 20 - Prob. 20.6PCh. 20 - Prob. 20.7PCh. 20 - Prob. 20.8PCh. 20 - Prob. 20.9PCh. 20 - Prob. 20.10PCh. 20 - Prob. 20.11PCh. 20 - Prob. 20.12PCh. 20 - Prob. 20.13PCh. 20 - Prob. 20.14PCh. 20 - Prob. 20.15PCh. 20 - Prob. 20.16PCh. 20 - Prob. 20.17PCh. 20 - Prob. 20.1BYPCh. 20 - Prob. 20.2BYPCh. 20 - Prob. 20.3BYPCh. 20 - Prob. 20.4BYPCh. 20 - Prob. 20.5BYPCh. 20 - Prob. 20.6BYPCh. 20 - Analytic Case 20–8 Various changes LO20–1 through...Ch. 20 - Prob. 20.9BYPCh. 20 - Prob. 20.10BYPCh. 20 - Prob. 20.11BYPCh. 20 - Prob. 20.12BYP
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