Question

The before-tax income for Whispering Co. for 2020 was $97,000 and $72,300 for 2021. However, the accountant noted that the following errors had been made:

1.		Sales for 2020 included amounts of $38,500 which had been received in cash during 2020, but for which the related products were delivered in 2021. Title did not pass to the purchaser until 2021.
2.		The inventory on December 31, 2020, was understated by $7,800.
3.		The bookkeeper in recording interest expense for both 2020 and 2021 on bonds payable made the following entry on an annual basis.

Interest Expense	16,200
Cash		16,200

The bonds have a face value of $270,000 and pay a stated interest rate of 6%. They were issued at a discount of $17,000 on January 1, 2020, to yield an effective-interest rate of 7%. (Assume that the effective-yield method should be used.)

4.

Ordinary repairs to equipment had been erroneously charged to the Equipment account during 2020 and 2021. Repairs in the amount of $8,100 in 2020 and $8,700 in 2021 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 2020 and 2021. (Enter negative amounts using either a negative sign preceding the number e.g. -15,000 or parentheses e.g. (15,000). Round answers to 0 decimal places, e.g. 125.)

		2020		2021
Income Before Tax		$Enter a dollar amount		$Enter a dollar amount
Corrections:
Select an itemAdjustment to Bond Interest ExpenseAdjustment to Bond Interest PayableDepreciation Not Recorded on Capitalized RepairsDepreciation Recorded on Improperly Capitalized RepairsOverstatement of 2020 Ending InventoryRepairs Erroneously Charged to the Equipment AccountRepairs Not Charged to Equipment AccountSales Erroneously Excluded in 2020 IncomeSales Erroneously Included in 2020 IncomeUnderstatement of 2020 Ending Inventory Adjustment to Bond Interest ExpenseAdjustment to Bond Interest PayableDepreciation Not Recorded on Capitalized RepairsDepreciation Recorded on Improperly Capitalized RepairsOverstatement of 2020 Ending InventoryRepairs Erroneously Charged to the Equipment AccountRepairs Not Charged to Equipment AccountSales Erroneously Excluded in 2020 IncomeSales Erroneously Included in 2020 IncomeUnderstatement of 2020 Ending Inventory		Enter a dollar amount		Enter a dollar amount
Select an itemAdjustment to Bond Interest ExpenseAdjustment to Bond Interest PayableDepreciation Not Recorded on Capitalized RepairsDepreciation Recorded on Improperly Capitalized RepairsOverstatement of 2020 Ending InventoryRepairs Erroneously Charged to the Equipment AccountRepairs Not Charged to Equipment AccountSales Erroneously Excluded in 2020 IncomeSales Erroneously Included in 2020 IncomeUnderstatement of 2020 Ending Inventory Adjustment to Bond Interest ExpenseAdjustment to Bond Interest PayableDepreciation Not Recorded on Capitalized RepairsDepreciation Recorded on Improperly Capitalized RepairsOverstatement of 2020 Ending InventoryRepairs Erroneously Charged to the Equipment AccountRepairs Not Charged to Equipment AccountSales Erroneously Excluded in 2020 IncomeSales Erroneously Included in 2020 IncomeUnderstatement of 2020 Ending Inventory		Enter a dollar amount		Enter a dollar amount
Select an itemAdjustment to Bond Interest ExpenseAdjustment to Bond Interest PayableDepreciation Not Recorded on Capitalized RepairsDepreciation Recorded on Improperly Capitalized RepairsOverstatement of 2020 Ending InventoryRepairs Erroneously Charged to the Equipment AccountRepairs Not Charged to Equipment AccountSales Erroneously Excluded in 2020 IncomeSales Erroneously Included in 2020 IncomeUnderstatement of 2020 Ending Inventory Adjustment to Bond Interest ExpenseAdjustment to Bond Interest PayableDepreciation Not Recorded on Capitalized RepairsDepreciation Recorded on Improperly Capitalized RepairsOverstatement of 2020 Ending InventoryRepairs Erroneously Charged to the Equipment AccountRepairs Not Charged to Equipment AccountSales Erroneously Excluded in 2020 IncomeSales Erroneously Included in 2020 IncomeUnderstatement of 2020 Ending Inventory		Enter a dollar amount		Enter a dollar amount
Select an itemAdjustment to Bond Interest ExpenseAdjustment to Bond Interest PayableDepreciation Not Recorded on Capitalized RepairsDepreciation Recorded on Improperly Capitalized RepairsOverstatement of 2020 Ending InventoryRepairs Erroneously Charged to the Equipment AccountRepairs Not Charged to Equipment AccountSales Erroneously Excluded in 2020 IncomeSales Erroneously Included in 2020 IncomeUnderstatement of 2020 Ending Inventory Adjustment to Bond Interest ExpenseAdjustment to Bond Interest PayableDepreciation Not Recorded on Capitalized RepairsDepreciation Recorded on Improperly Capitalized RepairsOverstatement of 2020 Ending InventoryRepairs Erroneously Charged to the Equipment AccountRepairs Not Charged to Equipment AccountSales Erroneously Excluded in 2020 IncomeSales Erroneously Included in 2020 IncomeUnderstatement of 2020 Ending Inventory		Enter a dollar amount		Enter a dollar amount
Select an itemAdjustment to Bond Interest ExpenseAdjustment to Bond Interest PayableDepreciation Not Recorded on Capitalized RepairsDepreciation Recorded on Improperly Capitalized RepairsOverstatement of 2020 Ending InventoryRepairs Erroneously Charged to the Equipment AccountRepairs Not Charged to Equipment AccountSales Erroneously Excluded in 2020 IncomeSales Erroneously Included in 2020 IncomeUnderstatement of 2020 Ending Inventory Adjustment to Bond Interest ExpenseAdjustment to Bond Interest PayableDepreciation Not Recorded on Capitalized RepairsDepreciation Recorded on Improperly Capitalized RepairsOverstatement of 2020 Ending InventoryRepairs Erroneously Charged to the Equipment AccountRepairs Not Charged to Equipment AccountSales Erroneously Excluded in 2020 IncomeSales Erroneously Included in 2020 IncomeUnderstatement of 2020 Ending Inventory		Enter a dollar amount		Enter a dollar amount
Corrected Income Before Tax		$Enter a total amount for year 2020		$Enter a total amount for year 2021

Answer 1

Corrected income before taxes
						2020	2021
Income before tax						97000	72300
Corrections:
Salaes erroneously included in 2020 income					(Note:1)	-38500	38500
Understatement of 2020 ending inventory					(Note:2)	7800	-7800
Adjustment to bond interest expense					(Note:3)	-1510	-1616
Repairs erroneously charged to the equipment account					(Note:4)	-8100	-8700
Depreciation recorded on improperly capitalized repairs					(Note:4)	810	1680
Corrected income before tax						57500	94364
Note:1
Sales are recorded when the title is passed to the purchaser.
In this case,title is obtained in 2021.
Hence,sales to be recognized in 2021
Note:2
Understatement of ending inventory will result in decrease of profit.
So,if we correct the ending inventory,profit will increase.
This ending inventory of 2020 will be the beginning inventory of 2021.
Understatement of beginning inventory will result in increase of profit.
So,if we correct the beginning inventory,profit will decrease.
Note:3
Interest expense=Carrying amount of bond*effective interest rate
Carrying amount as on 2020=Face value-Discount=270000-17000=$ 253000
Journal entry:
					Debit	Credit
Interest expense				(253000*7%)	17710
Discount on bonds payable				(Plug)		1510
Cash				(270000*6%)		16200
Interest expense already recognized=$ 16200
Interest expense to be recognized correctly=17710-16200=$ 1510
Balance in discount on bonds payable=17000-1510=$ 15490
Carrying amount as on 2021=Face value-Discount=270000-15490=$ 254510
Journal entry:
					Debit	Credit
Interest expense				(254510*7%)	17816
Discount on bonds payable				(Plug)		1616
Cash				(270000*6%)		16200
Interest expense already recognized=$ 16200
Interest expense to be recognized correctly=17816-16200=$ 1616
Note:4
Ordinary repairs should be charged in the income statement
This will reduce the income before taxes
Depreciation has computed erroneously on the ordinary repairs.
This has to be removed from the income statement to arrive at the correct income.
Depreciation for 2020=8100*10%=$ 810
Depreciation for 2021=(8100+8700)*10%=$ 1680