Question

On January 2, 2020, $100,000 of 10%, 10-year bonds were issued for $96,600. The $3,400 discount was charged to Interest Expense. The bookkeeper, Mark Landis, records interest only on the interest payment dates of January 1 and July 1.

What is the effect on reported net income for 2020 of this error, assuming straight-line amortization of the discount? (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit

What entry is necessary to correct for the failure to accrue interest, assuming that the books are not closed for 2020? (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit Click if you would like to Show Work for this question: Open Show Work

Answer 1

Discount amortization for the year = total discount / life of bonds = $3,400 /10 = $340

Discount recognized in interest = $3,400

Interest not accrued for December 31 = $100,000 X 10% X 6/12 = $5,000

Net effect of errors = Correct discount + correct interest accrual – incorrect discount amortization

= $340 + $5,000 - $3,400 = $1,940 expense understated.

Net income is overstated by $1,940.

Balances required after correction of errors made:

Discount on bonds payable = original balance – amortization for the year = $3,400 - $340 = $3,060

Interest expense to be recorded = $1,940

Interest payable for second quarter = $5,000

Entry:

Account	Debit	Credit
Interest expense	$      1,940
Discount on bonds payable	$      3,060
Interest payable		$        5,000
[Entry to correct errors]

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