At the end of 2015, Majors Furniture Company failed to accrue $70,500 of interes

Question

At the end of 2015, Majors Furniture Company failed to accrue $70,500 of interest expense that accrued during the last five months of 2015 on bonds payable. The bonds mature in 2027. The discount on the bonds is amortized by the straight-line method. The following entry was recorded on February 1, 2016, when the semiannual interest was paid:

Interest expense      84,600

     Discount on bonds payable 3,100

     Cash                                   81,500

Required:

1)   Prepare any journal entry necessary to correct the error as well as any adjusting entry for 2016 related to the situation described. (Ignore income taxes.) (Do not round intermediate calculations and round your final answers to nearest whole dollar amount. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

2)    Prepare journal entry that should have been recorded, if done correctly to start. (Do not round intermediate calculations and round your final answers to nearest whole dollar amount. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Explanation / Answer

1) There is no error in the present entry.

But company had to accrue interest expense for the last 5 months of 2015. So company should pass a journal entry to record the entry

Interest Expense Accrued/Payable A/c 70500

To Interest Expense A/c 70500

2) If correct entry would have been passed in the year 2015 for the interest accrued then the entry would be:

Interest Expense Accrued/Payable A/c 169200

To Interest Expense A/c 169200

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