Question

The before-tax income for Lonnie Holdiman Co. for 2017 was \(101,000 and \)77,400 for 2018. However, the accountant noted that the following errors had been made:

1. Sales for 2017 included amounts of \(38,200 which had been received in cash during 2017, but for which the related products were delivered in 2018. Title did not pass to the purchaser until 2018.

2. The inventory on December 31, 2017, was understated by \)8,640.

3. The bookkeeper in recording interest expense for both 2017 and 2018 on bonds payable made the following entry on an annual basis. Interest Expense 15,000 Cash 15,000

The bonds have a face value of \(250,000 and pay a stated interest rate of 6%. They were issued at a discount of \)15,000 on January 1, 2017, to yield an effective-interest rate of 7%. (Assume that the effective-yield method should be used.)

4. Ordinary repairs to equipment had been erroneously charged to the Equipment account during 2017 and 2018. Repairs in the amount of \(8,500 in 2017 and \)9,400 in 2018 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.

Instructions

Prepare a schedule showing the determination of corrected income before taxes for 2017 and 2018

Short answer

Depreciation is the allocation of the cost to its useful life, and corrected income before tax for 2017 is $62,340 and for 2018 is $96,949

Step-by-step solution

Definition of Depreciation

Depreciation is defined as the accounting process which allocates the cost of an asset to its estimated useful life.

Schedule showing corrected Income

	2017 ($)	2018 ($)
Incorrect Income before tax	101,000	77,400
Unearned Revenue, earned in 2018	-38,200	38,200
Understated Inventory	8,640	-8,640
Short Interest Booked	-1,450
Short interest Booked		-1,551
Repairs Booked	-8,500	-9,400
Excess Depreciation	850
Excess Depreciation		940
Correct Income before tax	62,340	96,949