Select your language

Suggested languages for you:
Log In Start studying!
Answers without the blur. Just sign up for free and you're in → Illustration

Q20E.

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 1313

Short Answer

The before-tax income for Lonnie Holdiman Co. for 2017 was $101,000 and $77,400 for 2018. However, the accountant noted that the following errors had been made:

1. Sales for 2017 included amounts of $38,200 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 $8,640.

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 15,000 Cash 15,000

The bonds have a face value of $250,000 and pay a stated interest rate of 6%. They were issued at a discount of $15,000 on January 1, 2017, to yield an effective-interest rate of 7%. (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 $8,500 in 2017 and $9,400 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.

Instructions

Prepare a schedule showing the determination of corrected income before taxes for 2017 and 2018

Depreciation is the allocation of the cost to its useful life, and corrected income before tax for 2017 is $62,340 and for 2018 is $96,949

See the step by step solution

Step by Step Solution

Step 1: Definition of Depreciation

Depreciation is defined as the accounting process which allocates the cost of an asset to its estimated useful life.

Step 2: Schedule showing corrected Income

2017 ($)

2018 ($)

Incorrect Income before tax

101,000

77,400

Unearned Revenue, earned in 2018

-38,200

38,200

Understated Inventory

8,640

-8,640

Short Interest Booked

-1,450

Short interest Booked

-1,551

Repairs Booked

-8,500

-9,400

Excess Depreciation

850

Excess Depreciation

940

Correct Income before tax

62,340

96,949

Most popular questions for Business-studies Textbooks

Taveras Co. decides at the beginning of 2017 to adopt the FIFO method of inventory valuation. Taveras had used the LIFO method for financial reporting since its inception on January 1, 2015, and had maintained records adequate to apply the FIFO method retrospectively. Taveras concluded that FIFO is the preferable inventory method because it reflects the current cost of inventory on the balance sheet. The following table presents the effects of the change in accounting principles on inventory and cost of goods sold. Inventory Determined by Cost of Goods Sold Determined by Date LIFO Method FIFO Method LIFO Method FIFO Method January 1, 2015 $ 0 $ 0 $ 0 $ 0 December 31, 2015 100 80 800 820 December 31, 2016 200 240 1,000 940 December 31, 2017 320 390 1,130 1,100 Other information: 1. For each year presented, sales are $3,000 and operating expenses are $1,000. 2. Taveras provides two years of financial statements. Earnings per share information is not required. Instructions (a) Prepare income statements under LIFO and FIFO for 2015, 2016, and 2017. (b) Prepare income statements reflecting the retrospective application of the accounting change from the LIFO method to the FIFO method for 2017 and 2016. (c) Prepare the note to the financial statements describing the change in method of inventory valuation. In the note, indicate the income statement line items for 2017 and 2016 that were affected by the change in accounting principle. (d) Prepare comparative retained earnings statements for 2016 and 2017 under FIFO. Retained earnings reported under LIFO are as follows: Retained Earnings Balance December 31, 2015 $1,200 December 31, 2016 2,200 December 31, 2017 3,070

Icon

Want to see more solutions like these?

Sign up for free to discover our expert answers
Get Started - It’s free

Recommended explanations on Business-studies Textbooks

94% of StudySmarter users get better grades.

Sign up for free
94% of StudySmarter users get better grades.