Question

At the end of 2017, Majors Furniture Company failed to accrue $70,000 of interest expense that accrued during the last five months of 2017 on bonds payable. The bonds mature in 2029. The discount on the bonds is amortized by the straight-line method. The following entry was recorded on February 1, 2018, when the semiannual interest was paid:

Interest expense	84,000
Discount on bonds payable		3,000
Cash		81,000

   
Required:
1-a. Prepare any journal entry necessary to correct the error as well as any adjusting entry for 2018 related to the situation described. (Ignore income taxes.)
1-b. Prepare journal entry that should have been recorded, if done correctly to start.

Answer 1

• As the question says, 5 months interest expense should have been accrued in 2017.
  Since, the same has not been done, Net Income for 2017 has been overcastted by $70,000.

The resultant Retained Earnings balance for 2017 would also be overcastted by $ 70,000.

For Discount amortisation, $2500 (3000 x 5month/6months) should haven amortised in 2017.

• In 2018, Interest expense for 1 month (January) should have been recorded which is $84000 x 1/6months = $ 14,000. But, $84000 have been recorded as an expense. As a result, expenses have been overcastted by $ 70,000.
• Requirement 1 ‘a’

Date	Accounts title	Debit	Credit	Explanations
01-Feb-18	Discount on bonds payable	$                    2,500.00		Excess discount credited in 2018, now debited.
	Retained Earnings	$                67,500.00		Excess net income recorded due to error in 2017, now corrected by debiting RE.
	Interest expense		$                 70,000.00	Excess Interest expense debited in 2018 now credited.
	(entry corrected)

• Requirement 1 ‘b’

Correct set of journal entries in 2017 and 2018

Date	Accounts title	Debit	Credit
31-Dec-17	Interest expense	$                 70,000.00
	Discount on Bonds payable		$                   2,500.00
	Interest Payable		$                 67,500.00
	(interest accrued)
01-Feb-18	Interest expense	$                 14,000.00
	Interest Payable	$                 67,500.00
	Discount on Bonds payable		$                       500.00
	Cash		$                 81,000.00
	(interest paid)