Chapter 22 Question 19 (Part Level Submission) On January 2, 2017, $100,000 of 1

Question

Chapter 22
Question 19 (Part Level Submission)
On January 2, 2017, $100,000 of 12%, 10-year bonds were issued for $96,700. The $3,300 discount
was charged to Interest Expense. The bookkeeper, Mark Landis, records interest only on the interest
payment dates of January 1 and July 1.
(a1)
What is the effect on reported net income for 2017 of this error, assuming straight-line
amortization of the discount?
(a2)
The parts of this question must be completed in order. This part will be available when you complete
the part above.

Explanation / Answer

Discount on bonds payable is a component of liabilities account. Instead of recording $3,300 as discount on bonds payable, the bookkeeper records $3,300 as interest expense on Jan 2, 2017.

Actuall Interest expense to be recognized for the 1 year (2017) is $330 ($3,300 / 10 years).

Excess amount of Interest expense recognized as of Dec 31, 2017 is $2,970 ($3,300 - $330)

Ultimately, this $2,970 of overstated expense understates the net income by $2,970.

Hence, the reported net income of 2017 is understated by $2,970

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