Question

The before-tax income for Ivanhoe Co. for 2020 was $104,000 and $81,200 for 2021. However, the accountant noted that the following errors had been made:
1. Sales for 2020 included amounts of $39,000 which had been received in cash during 2020, but for which the related products were delivered in 2021. Title did not pass to the purchaser until 2021.
2. The inventory on December 31, 2020, was understated by $9,400.
3. The bookkeeper in recording interest expense for both 2020 and 2021 on bonds payable made the following entry on an annual basis.
Interest Expense 14,400 Cash 14,400 The bonds have a face value of $240,000 and pay a stated interest rate of 6%. They were issued at a discount of $16,000 on January 1, 2020, to yield an effective-interest rate of 7%.
4. Ordinary repairs to equipment had been erroneously charged to the Equipment account during 2020 and 20221. Repairs in the amount of $8,600 in 2021 and $9,300 in 2022 were so charged. The company applies a rate of 10% to the balance in the Equipment account at the end of the year in its determination of depreciation charges.

Prepare a schedule showing the determination of corrected income before taxes for 2020 and 2021.

Answer 1

Answer:

Corrected Income for 2020 is $ 86540 and for 2021 is $160,610

Explanation:

Ivanhoe Co.

Correction of Income for              2020             2021

The before-tax income                $104,000      $81,200

1) Sales                                             (39,000)         39000

2) Inventory                                      (9,400)            9,400

3) Entry  wrongly made                    14,400           14,400

4) Correct Entry                                15,680           15,680

5) Add Depreciation                           860               930

Corrected Income                       $ 86540         $ 160,610  

1) Sales are included when the purchaser gets the title . They are the liability of the seller so they will be deducted from 2020 sales and added to 2021.

2) Ending inventory is deducted from COGS as it is understated it will be deducted from 2020 income and added to the 2021 income when it becomes the opening inventory.

3) Interest was received not given so the it will be treated as revenue not expense and added to the income statement.

4) Actual interest received  was ($ 240,000- $16,000)* 7% = $ 15680. So an entry for actual interest will be made.

5) Additional amount of depreciation was charged to 2020 and 2021 income statement  which will be added back. 10 % of $ 8600= $ 860 for 2020 and 10% of $ 9,300= $ 930 for 2021