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E 14-16 Error in amortization schedule
Wilkins Food Products, Inc. acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of the machine on January 1, 2009. 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 2011. The error had caused Wilkins to understate interest expense by 45,000 in 2009 and 40,000 in 2010.
Required:
1. Determine which accounts are incorrect as a result of these errors at January 1, 2011, before adjustments. Explain your answer. (Ignore income taxes)
The retained earnings account would be overstated by $85000 and Installment Note Payable account would be showing lower liability by $85000. It would have happened because at the time of making payment $85000 should have been shown as expense, instead of deducting from liability of Installment Note Payable account.
2. Prepare a journal entry to correct the error.
Retained Earnings Debit 85000
Installment Note Payable Credit 85000
3. What other step(s) would be taken in connection with the error.
The net Income for the year ended 2009 and 2010 to be shown with correct amount, when presenting annual report to shareholders. The fact of error should also be disclosed in footnotes to financial statements.
E 14-18 Installment note; amortization schedule
American Food Services, Inc. acquired a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2011. In payment for the 4 million machine, American Food Services issued a four-year installment note to be paid in four equal monthly payments at the end of each month. The payments include interest at the rate of 12%.
Required:
1. Prepare the journal entry for American Food Services’ purchase of the machine on January 1, 2011.
Machinery Dr 4 million
Installment Note Payable Cr 4 million
2. Prepare an amortization schedule for the four-year term of the installment note.
|year |Installment |Interest |Principal |Balance |
|0 | | | |4 |
|1 |1.3169 |0.48 |0.8369 |3.1631 |
|2 |1.3169 |0.3796 |0.9373 |2.2258 |
|3 |1.3169 |0.2671 |1.0498 |1.1760 |
|4 |1.3169 |0.1409 |1.1760 |0.0000 |
3. Prepare the journal entry for the first installment payment on December 31, 2011.
Installment Note Payable Debit 0.8369
Interest Expense Debit 0.48
Cash Credit 1.3169
4. Prepare the journal entry for the third installment payment on December 31, 2013.
Installment Note Payable Debit 1.0498
Interest Expense Debit 0.2671
Cash Credit 1.3169
P 14-21 Report bonds at fair value; quarterly reporting
Appling Enterprises issued 8% bonds with a face amount of 400,000 on January 1, 2011. The bonds sold for 331,364 and mature in 2030 (20 years). For bonds of similar risk and maturity the market yield was 10%. Interest is paid semiannually on June 30 and December 31. Appling determines interest expense at the effective rate. Appling elected the option to report these bonds at their fair value. The fair values of the bonds at the end of each quarter during 2011 as determined by their market values in the over-the- counter market were the following:
March 31 $350,000
June 30 340,000
September 30 335,000
December 31 342,000
Required:
1. By how much will Appling’s earnings be increased or decreased by the bon ds (ignoring taxes) in the March 31 quarterly financial statements?
331364*.025 interest = 8284
Carrying value of bond = 331364 + (8284-400000*.02) = 331648
Unrealized gain = 350000-331648 = 18352
Earnings will increase by 18352-8284 = 10068
2. By how much will Appling’s earnings be increased or decreased by the bonds (ignoring taxes) in the June 30 quarterly financial statements?
331648*.025 interest = 8291
Carrying value of bond = 331648 + (8291-400000*.02) = 331939
Unrealized loss = 350000-340000 = 10000
Earnings will decrease by 10000+8291 = 18291
3. By how much will Appling’s earnings be increased or decreased by the bonds (ignoring taxes) in the September 30 quarterly financial statements?
331939*.025 interest = 8298
Carrying value of bond = 331939 + (8298-400000*.02) = 332237
Unrealized loss = 340000-335000 = 5000
Earnings will decrease by 5000+8298 = 13298
4. By how much will Appling’s earnings be increased or decreased by the bonds (ignoring taxes) in the December 31 annual financial statements?
332237*.025 interest = 8306
Carrying value of bond = 332237 + (8306-400000*.02) = 332543
Unrealized gain = 342000-335000 = 7000
Earnings will decrease by 8306-7000 = 1306
P 15-3 Direct financing and sales-type lease; lessee and lessor
Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians’ Leasing purchased a lithotripter from Rand for 2,000,000 and leased it to Mid-South Urologists Group, Inc. on January 1, 2011.
Lease Description
Quarterly lease payments $130,516-beginning of each period
Lease term 5 years (20 quarters)
No residual value; no BPO
Economic life of lithotripter 5 years
Implicit interest rate and lessee’s incremental borrowing rate 12 %
Fair Value of asset $2,000,000
Collectively of the lease payments is reasonably assured, and there are no lessor costs yet to be incurred.
Required:
1. How should this lease be classified by Mid-South Urologist Group and by Physicians’ Leasing?
It should be classified as capital lease as the term of lease payment and the life of the assets are the same.
2. Prepare appropriate entries for both Mid –South Urologist Group and Physicians’ Leasing from the inception of the lease through the second rental on April 1, 2011. Depreciation is recorded at the end of each fiscal year (December 31
|Quarter |Installment |Interest |Principal |Balance |
|0 | | | |2000000 |
|1 |130516 |0 |130516 |1869484 |
|2 |130516 |56085 |74431 |1795053 |
Physician Leasing
Jan 1 Machine Dr. 2000000
Cash Cr. 2000000
Jan 1 Cash Dr 130516
Lease Receivable Dr. 1869484
Machine Cr. 2000000
April1 Cash Dr. 130516
Lease Receivable Cr. 74431
Interest Income Cr. 56085
South Urologist
Jan 1 Machine Dr. 2000000
Cash Cr 130516
Lease Payable Cr. 1869484
April 1
Lease Payable Dr. 74431
Interest Expense Dr. 56085
Cash Cr. 130516
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