Response:
Lonnie Holdiman Co.
A Schedule calculating the adjusted income prior to taxes for 2020 and 2021:
2020 2021
Income before taxes $101,000 $77,400
1. Excess Sales revenue (38,200) 38,200
2. Inventory understated as of December 31, 2020 8,640 (8,640)
3. Discount on amortized bonds not accounted for (1,776) (1,901)
4. Equipment repairs not accounted for (8,500) (9,400)
5. Overstated depreciation from capitalized equipment repairs 850 940
Corrected income before tax $62,014 $96,599
Clarification:
a) Data and Calculations:
Income before tax for 2020 = $101,000
Income before tax for 2021 = $77,400
1. Sales Revenue 2020 $38,200; 2021 Sales Revenue $38,200
2. Understated inventory for 2020 $8,640; 2021 $8,640
3. Unrecorded interest expense on bonds for 2020 $1,776
Interest expense on bonds for 2021 $1,901
4. Unrecorded equipment repairs 2020 $8,500 falsely recorded to Equipment account $8,500
Equipment repairs 2021 $9,400 misclassified to Equipment account $9,400
5. Overstated depreciation expense for 2020 $850
Overstated depreciation expense for 2021 $940.
Bond Calculations:
Outstanding bond value:
Face value of the bond = $250,000
Discount = 15,000
Bond proceeds = $235,000
Bond interest payment = $15,000 ($250,000 * 6%)
Bond interest expense = $16,450 ($235,000 * 7%)
Amortized discount = $1,450
On December 31, 2017:
Bond interest payment = $15,000 ($250,000 * 6%)
Bond interest expense = $16,450 ($235,000 * 7%)
Amortized discount = $1,450 ($16,450 - $15,000)
Outstanding value = $236,450 ($235,000 + 1,450)
On December 31, 2018:
Bond interest payment = $15,000 ($250,000 * 6%)
Bond interest expense = $16,552 ($236,450 * 7%)
Amortized discount = $1,552 ($16,552 - $15,000)
Outstanding value = $238,002 ($236,450 + 1,552)
On December 31, 2019:
Bond interest payment = $15,000 ($250,000 * 6%)
Bond interest expense = $16,660 ($238,002 * 7%)
Amortized discount = $1,660 ($16,660 - $15,000)
Outstanding value = $239,662 ($238,002 + 1,660)
On December 31, 2020:
Bond interest payment = $15,000 ($250,000 * 6%)
Bond interest expense = $16,776 ($239,662 * 7%)
Amortized discount = $1,776 ($16,776 - $15,000)
Outstanding value = $241,438 ($239,662 + 1,776)
On December 31, 2021:
Bond interest payment = $15,000 ($250,000 * 6%)
Bond interest expense = $16,901 ($241,438 * 7%)
Amortized discount = $1,901 ($16,901 - $15,000)
Outstanding value = $243,339 ($241,438 + 1,901)
Depreciation on Capitalized Equipment Repairs:
Excess depreciation expense:
For 2020 = $850 ($8,500 * 10%)
For 2021 = $940 ($9,400 * 10%)
