Question

Exercise 20-22 (Algo) Error correction; accrued interest on bonds [LO20-6]

At the end of 2020, Majors Furniture Company failed to accrue $68,500 of interest expense that accrued during the last five months of 2020 on bonds payable. The bonds mature in 2032. The discount on the bonds is amortized by the straight-line method. The following entry was recorded on February 1, 2021, when the semiannual interest was paid:

Interest expense	82,200
Discount on bonds payable		2,700
Cash		79,500

   
Required:
1-a. Prepare any journal entries necessary to correct the error, as well as any adjusting entry for 2021 related to the situation described. (Ignore income taxes.)
1-b. Prepare the journal entries that should have been recorded, if done correctly to start.

Answer 1

Requirement 1-a:-

The interest expense for 5 months is calculated as :-

$82,200 * 5 months/ 6 months = $68,500

Discount amortization for 6 months = $2,700

Discount amortization for 5 months = $2,700 * 5 months / 6 months = $2,250

As a result of failing to accrue the interest expense on the bonds for 2021, the net income is overstated by $69,000 and interest expense is understated by $69,000.

Particulars	Amount	Amount
Retained Earnings A/c	68,500
To Interest expense A/c		68,500
(To rectify prior year retained earnings)

The adjusting entry is :-

Particulars	Amount	Amount
Interest expense A/c	68,500
To Discount on Bonds payable a/c		2,250
To Interest Payable A/c		66,250
(To record interest and amortization expense for 5 months)

Requirement 1-b:-

The journal entries that should have been recorded , if done correctly is :-

	Particulars	Amount	Amount
December 31, 2020	Interest expense A/c	68,500
	To Discount on Bonds payable a/c		2,250
	To Interest Payable A/c		66,250
	(To record interest and amortization expense for 5 months)

The payment of interest entry is :-

	Particulars	Amount	Amount
February 1, 2021	Interest expense A/c	13,700
	Interest payable a/c	66,250
	To Discount on Bonds payable a/c		450
	To Cash A/c		79,500
	(To record the payment of interest)

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