Question

On January 2, 2017, \(100,000 of 11%, 10-year bonds were issued for \)97,000. The $3,000 discount was charged to Interest Expense. The bookkeeper, Mark Landis, records interest only on the interest payment dates of January 1 and July 1. What is the effect on reported net income for 2017 of this error, assuming straight-line amortization of the discount? What entry is necessary to correct for this error, assuming that the books are not closed for 2017?

Short answer

The net income of the company was overstated by $1,400. Interest expense is debited, and interest payable is credited by $1,400.

Step-by-step solution

Calculation of Discount to be amortized

$$\begin{gathered} \mathbf{Discount}\mathbf{}\mathbf{to}\mathbf{}\mathbf{be}\mathbf{}\mathbf{amortized}\mathbf{=}\frac{\mathbf{Total}\mathbf{}\mathbf{discount}}{\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{periods}} \\ \mathbf{=}\frac{\mathbf{3}\mathbf{,}\mathbf{000}}{\mathbf{2}\mathbf{\times }\mathbf{10}} \\ \mathbf{=}\mathbf{\$}\mathbf{150} \end{gathered}$$

The net income of the company was overstated with the amount of $1,400. (1100+300)

Journal entry

Date	Particulars	Debit ($)	Credit ($)
	Interest Expense	1,400
	Interest Payable		1,400
	(Being entry to record the error is recorded)