Wilkins Food Products Inc. acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of the machine on January 1, 2014. In payment for the machine Wilkins issued a three-year installment note to be paid in three equal payments at the end of each year. The payments include interest at the rate of 13%. Lawrence made a conceptual error in preparing the amortization schedule which Wilkins failed to discover until 2016. As a result of the error, Wilkins understated interest expense by $60,000 in 2014 and $55,000 in 2015.
1. Indicate below which accounts are incorrect as a result of these errors at January 1, 2016 and whether those accounts are understated or overstated. (Ignore income taxes.)
cash notes payable
2. Prepare a journal entry to correct the error.
Interest expenses refer to the expenses, which an organization incurs to borrow funds. It may be the cost that is charged by the lender from the borrower for using the money borrowed from the lender.
Answer and Explanation:
a) The retained earnings account will be overstated by $15,000 and the installment Notes payable account will aim to show lower liability by $1,15,000. It will happen because at the time when payment is made $1,15,000 is shown as expenses instead of deducting it from the liability of installment notes payable account.
b) Journal entry to correct the error will be:
|Date||Account titles||Debit ($)||Credit($)|
|To Notes Payable||1,15,000|
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from Financial Accounting: Help and ReviewChapter 5 / Lesson 18