Question

Wilkins Food Products Inc. acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of the machine on January 1, 2019. 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 10%. Lawrence made a conceptual error in preparing the amortization schedule, which Wilkins failed to discover until 2021. As a result of the error, Wilkins understated interest expense by $51,000 in 2019 and $46,000 in 2020.

Required:
1. Indicate in the table below which accounts are incorrect as a result of these errors at January 1, 2021 and whether those accounts are understated or overstated. (Ignore income taxes.)

account	2019	2020

2. Prepare a journal entry to correct the error.
3. Will Wilkins account for the error (a) retrospectively or (b) prospectively?

Wilkins account for the error

?

Answer 1

ANSWER:

Requirement 1)

The understatement of interest expense amounting to $51,000 in the fiscal 2019 and $46,000 in the fiscal 2020 would result in overstatement of net income.

Therefore retained earnings and understatement of notes payable balances in 2019 and 2020.

As a result of the above error the beginning balances of the following accounts in January 1, 2021 are overstated and understated.

Particulars	2019	2020
Retained Earnings	Overstated	Overstated
Notes Payable	Understated	Understated

Requirement 2)

Date	Particulars	Debit	Credit
Jan 1, 2021	Retained Earnings (51,000 + 46,000)	97,000
	To Notes Payable		97,000
	(To record adjusting entry for the error in interest expense)

Requirement 3)

Will Wilkins account for the error prospectively, i.e, the error is recorded only in the present and it is not recorded in the past.