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.) Account 2016 2017

Answer 1

Wilkins food Products inc. Requirement 1 The error caused both 2016 and 2017 net income to be overstated, so retained earnings is overstated by a total of $85000. Also the Note Payable would be understated by the same amount.Remember the entry to record interest is: Interest Expense a/c Dr. Note Payable (difference) a/c To Cash XXX XXX Dr. XXX So if interest expense is understated, the reduction in the note will be too much, causing the balance in that account to be understated. Requirement 2 85000 Retained Earnings (overstatement of 2016 - 16 income) To Note Payable 85000