Exercise 22-20 The before-tax income for Tamarisk Co. for 2017 was $98,000 and $80,300 for 2018....

Exercise 22-20

The before-tax income for Tamarisk Co. for 2017 was $98,000 and $80,300 for 2018. However, the accountant noted that the following errors had been made:

1.		Sales for 2017 included amounts of $41,300 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 $7,800.
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	18,200
Cash		18,200

The bonds have a face value of $260,000 and pay a stated interest rate of 7%. They were issued at a discount of $14,000 on January 1, 2017, to yield an effective-interest rate of 8%. (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 $8,200 in 2017 and $9,300 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.

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

Expert Solution



corrected income before tax
	2017	2018
Income before tax	$ 98,000	$ 80,300
Corrections:
Sales Erroneously Included	$ (41,300)	$ 41,300
Income Understatement of 2017 Ending Inventory	$ 7,800	$ (7,800)
Adjustment to Bond Interest Expense	$ (1,480)	$ (1,598)
Depreciation Recorded on Improperly Capitalized Repairs	$ 820	$ 1,750
		(820)+(9300 x 10%)
Repairs Erroneously Charged to the Equipment Account	$ (8,200)	$ (9,300)
Corrected Income Before Tax	$ 55,640	$ 104,652

Working note

cash	interest expense	discount
			balance
			$ 246,000
18200	$ 19,680	$ 1,480	$ 247,480
18200	$ 19,798	$ 1,598	$ 249,078

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