1. A company makes an error in 2015 that overstated its 2015 net income and disc

Question

1. A company makes an error in 2015 that overstated its 2015 net income and discovers the error in 2017. When preparing its 2017 financial statements, the company should: (3 points) a) Report a non-operating loss on its 2017 Income Statement that reduces 2017 net income. b) Ignore the error since it has probably corrected itself. c) Report a prior period adjustment on its 2017 Statement of Retained Earnings that reduces the January 1, 2017 balance of Rctained Earnings. d) Report an extraordinary loss on its 2017 Income Statement that reduces 2017 net income 2. On January 1, 2017, Buzzmore Company signed an agreement to lease equipment from Gavin Company. The term of the noncancelable lease is 5 years and requires annual lease payments of S7,194.48 on January 1, 2017,2018, 2019, 2020 and 2021. Title to the equipment will pass to Buzzmore at the end of the lease term. The equipment has a value of S30,000 on January 1, 2017 and has an estimated life of 5 ycars with no salvage valuc. Buzzmore uses straight-linc depreciation for its equipment and has an increment borrowing rate of 10%. Buzzmore made the following entry on January 1, 2017. This was the only entry Buzzmore made in 2017 related to the lease. Rent Expense $7,194.48 Cash $7,194.48 As part of the audit team that is conducting the 2017 audit of Buzzmore's financial statements, a member of the audit team believes the lease should be recorded as a finance lease. Do you agree? If you agree, prepare the correcting entry (or entries) that should be made as of December 31, 2017 to correct Buzzmore's accounts assuming the company's closing entries have not been made. (8 points) 3. A spreadsheet is provided that lists a series of errors that were discovered in January 2019 while examining the accounting records for 2017 and 2018. Enter the amounts into the blue boxes that would correct the reported net income for 2017 and 2018 due to each listed error. For example, if you believe the error overstated 2017 net income by $8,000, then enter -8,000 into the blue box in the 2017 column to reduce reported net income by $8,000. (14 points)

Explanation / Answer

1. While preparing its 2017 financial statements, the company should

C) Report a prior period adjustment on its 2017 Statement of Retained Earnings that reduces the January 1, 2017 balance of Retained Earnings.

2. The lease should be classified as finance lease since the ownership and title of the asset will be transferred to Buzzmore at the end of the lease term.

Following are the correcting entries which are to be passed

Present value of lease payments

Lease term = 5 years

Lease amount = 7,194.48

Cost of borrowings = 10%

Present Value = 7,194.48 + 7,194.48 /1.1 + 7,194.48/1.1^2 + 7,194.48/1.1^3 +7,194.48/1.1^4 = 30,000

Amortisation table

3.

Cash $ 7,194.48 To Rent Expense $ 7,194.48 Reversal of entry already passed Equiment 30,000 To Cash 7,194.48 To Lease liability 22,805.52 Recording of equipment and lease liability Depreciation Expense (30,000/5) 6,000 To Accumulated Depreciation 6,000 Recording of depreciation Interest Expense 2,280.55 To Lease Liability (Interest payable) 2,280.55 Recording of interest expense

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