Exercise 22-20 The before-tax income for Sarasota Co. for 2017 was $98,000 and $

ID: 2530186 • Letter: E

Question

Exercise 22-20

The before-tax income for Sarasota Co. for 2017 was $98,000 and $80,300 for 2018. However, the accountant noted that the following errors had been made:

1.Sales for 2017 included amounts of $41,300 which had been received in cash during 2017, but for which the related products were delivered in 2018. Title did not pass to the purchaser until 2018.

2.The inventory on December 31, 2017, was understated by $7,800.

3.The bookkeeper in recording interest expense for both 2017 and 2018 on bonds payable made the following entry on an annual basis.

Interest Expense. 18,200

Cash. 18,200

The bonds have a face value of $260,000 and pay a stated interest rate of 7%. They were issued at a discount of $14,000 on January 1, 2017, to yield an effective-interest rate of 8%. (Assume that the effective-yield method should be used.)

4.Ordinary repairs to equipment had been erroneously charged to the Equipment account during 2017 and 2018. Repairs in the amount of $8,200 in 2017 and $9,300 in 2018 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 2017 and 2018. (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.)

Corrections:

adjustment to Bond Interest ExpenseAdjustment to Bond Interest PayableDepreciation Not Recorded on Capitalized RepairsDepreciation Recorded on Improperly Capitalized RepairsOverstatement of 2017 Ending InventoryRepairs Erroneously Charged to the Equipment AccountRepairs Not Charged to Equipment AccountSales Erroneously Excluded in 2017 IncomeSales Erroneously Included in 2017 IncomeUnderstatement of 2017 Ending Inventory

Adjustment to Bond Interest ExpenseAdjustment to Bond Interest PayableDepreciation Not Recorded on Capitalized RepairsDepreciation Recorded on Improperly Capitalized RepairsOverstatement of 2017 Ending InventoryRepairs Erroneously Charged to the Equipment AccountRepairs Not Charged to Equipment AccountSales Erroneously Excluded in 2017 IncomeSales Erroneously Included in 2017 IncomeUnderstatement of 2017 Ending Inventory

I lost my green block on some of them so I put the dollar sign symbol in order for you to know that something goes there.

Explanation / Answer

Corrections:

Understatement of 2017 Closing Inventory

Working Note on Bonds:

Calculate the effective interest expenses for the year ended 31st December 2017 using the equation as shown below:

Effective Interest Rate=(Value of Bond-Discount)*Rate of Interest

(260000-14000)*8%

=19680

Therefore:

2017 2018 Income Before Tax 98000 80300

Corrections:

Sales wrongly included in 2017 Income statement -41300 41300

Understatement of 2017 Closing Inventory

7800 -7800 Adjustment to Bond Interest Expense(See Working Note) -1480 -1598 Repairs Erroneously Charged to the Equipment Account -8200 -9300 Depreciation recorded on improperly capitalized repairs (for 2018=(8200-820+9300)*10%) 820 1668 Corrected Income Before Tax 55640 104570

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Exercise 22-20 (Part Level Submission) Presented below is selected information f

Exercise 22-20 The before-tax income for Splish Co. for 2017 was $107,000 and $8

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Exercise 22-20 The before-tax income for Sarasota Co. for 2017 was $98,000 and $

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