Wilkins Food Products Inc. acquired a packaging machine from Lawrence Specialist

Question

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 13%. Lawrence made a conceptual error in preparing the amortization schedule which Wilkins failed to discover until 2016. As a result of the error, Wilkins understated interest expense by $60,000 in 2014 and $55,000 in 2015. Required:

1. Indicate in the table below which accounts are incorrect as a result of these errors at January 1, 2016 and whether those accounts are understated or overstated. (Ignore income taxes.)

Retained Earnings

intrest expense

amortization expense

cash notes payable

2. Prepare a journal entry to correct the error.

Explanation / Answer

Answer:1 The retained earnings account would be overstated by $15000 and Installment Note Payable account would be showing lower liability by $115000.   It would have happened because at the time of making payment $115000 should have been shown as expense, instead of deducting from liability of Installment Note Payable account.

Answer:2 Journal entry to correct the error.

Retained earnings A/C Dr.$115000

     To notes payable A/C                     $115000

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