Question

Wilkins Food Products Inc. acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of the machine on January 1, 2016. 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 10%. Lawrence made a conceptual error in preparing the amortization schedule, which Wilkins failed to discover until 2018. As a result of the error, Wilkins understated interest expense by $45,000 in 2016 and $40,000 in 2017.

Required:
1. Indicate in the table below which accounts are incorrect as a result of these errors at January 1, 2018 and whether those accounts are understated or overstated. (Ignore income taxes.)
2. Prepare a journal entry to correct the error.

Complete this question by entering your answers in the tabs below.

• Required 1
• Required 2

Indicate in the table below which accounts are incorrect as a result of these errors at January 1, 2018 and whether those accounts are understated or overstated. (Ignore income taxes.)

1.

	Account 2016 2017

2.

Journal entry worksheet

• Record correction of error.

Note: Enter debits before credits.

	Event General Journal Debit Credit 1

Answer 1

Requirement 1: The understatement of interest expense amounting to $45,000 in the fiscal 2016 and $40,000 in the fiscal 2017 would result in overstatement of net income and therefore retained earnings and understatement of notes payable balances in 2016 and 2017. As a result of the above error the beginning balances of the following accounts in January 1, 2018 are overstated and understated.

Account Title	2016	2017
Retained Earnings	Overstated	Overstated
Notes Payable	Understated	Understated

Requirement 2: Prepare the following journal entry

Date	Account Title	Debit	Credit
Jan. 1	Retained Earnings ($45,000 + $40,000)	$85,000
2018	Notes Payable		$85,000
	To record adjusting entry for the error in interest expense