Task: Error Analysis
The before-tax income for Lonnie Holdiman Co. for 2007 was $101,000 and $77,400 for 2008. However, the accountant noted that the following errors had been made:
1. Sales for 2007 included amounts of $38,200 which had been received in cash during 2007, but for which the related products were delivered in 2008. Title did not pass to the purchaser until 2008.
2. The inventory on December 31, 2007 was understatted by $8,640.
3. The bookkeeper in recording interest expense for both 2007 and 2008 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, 2007, to yield an effective interest
4. Ordinary repairs to equipment had been erroneously charged to the Equipment account during 2007 and 2008. Repairs in the amount of $8,500 in 2007 and $9,4000 in 2008 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 2007 and 2008.