Question

Exercise 14-16 Error in amortization schedule [LO14-3] 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 9%. Lawrence made a conceptual error in preparing the amortization schedule, which Wilkins failed to discover until 2016. The error had caused Wilkins to understate interest expense by $53,000 in 2014 and $48,000 in 2015. Required: 1. Determine which accounts are incorrect as a result of these errors at January 1, 2016, before any adjustments. (Select all that apply.) 2. Prepare a journal entry to correct the error. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Assume that the amount of cash paid on December 31, 2014 and December 31, 2015 is correct. Therefore in 2014 Interest expense understated by $53000 , Net Income overstated by $53000 , Retained earnings overstated by $53000 Notes Payable is understated by $53 000 Received Notes Payable is understated by $53000. 2015 Interest expense understated by $48000 Net Income overstated by $48,000 Retained earnings overstated by $101,000 ($53,000 + $48,000) Notes Payable is understated by $101,000 ($53,000 + $48,000)

Part 2: Prepare a journal entry to correct the error.
Debit Retained earnings 85,000
Credit Notes Payable 85,000