Question

At the end of 2017, Majors Furniture Company failed to accrue $76,000 of interest expense that accrued during the last five months of 2017 on bonds payable. The bonds mature in 2031. The discount on the bonds is amortized by the straight-line method. The following entry was recorded on February 1, 2018, when the semiannual interest was paid:

Interest expense	91,200
Discount on bonds payable		2,160
Cash		89,040

Required:
Prepare any journal entry necessary to correct the errors as of February 2, 2018, when the errors were discovered. Also, prepare any adjusting entry at December 31, 2018, related to the situation described. (Ignore income taxes.) (Do not round your intermediate calculations. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Solution: The entry made represents 6-months of interest ending February 1, 2018. The entry not made in 2017 would have been for five-months of interest, and amortization of five-months of the discount. Interest expense: 91,200 + 6 = 15,200 per month x 5 = $76,000 Discount amortization: 2,160 = 6 = 360 per month x 5 = $1,800 Interest payable: 89,040 + 6 = 14,840 per month x 5 = $74,200 $76,000 Proper Entries: Dec-17 Interest expenses Discount on bonds payable Interest payable (To record the interest and amortization expenses for five months) $1,800 $74,200 $15,200 $74,200 Feb-02 Interest expenses Interest payable Discount on bonds payable Cash (To record the payment of interest and amortization of discount on bonds payable) $360 $89,040 2017- Interest expense understated by $76,000 that means Net income overstated Retained earnings overstated by $76,000 2018- Interest expense overstated by $76,000 $76,000 Therefore, the correcting entry is: Retained earnings Interest expense (To record correcting entry for overstated net income) $76,000 $76,000 Adjusting entry for 2013: Interest expenses Discount on bonds payable Interest payable (To record the interest and amortization expenses for five months) $1,800 $74,200