In: Accounting
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.
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 |