Exercise 14–11
1. February 1, 2018
2. July 31, 2018
3. December 31, 2018
4. January 31, 2019
Interest expense (1/6 x 5% x [$731,364 + 568]).. 6,100*
* rounded
Exercise 14–12
1. March 1, 2018
2. August 31, 2018
3. December 31, 2018
4. February 28, 2019
Interest expense (2/6 x $21,150)……………………… 7,050
Exercise 14–13
1. January 1, 2018
2. June 30, 2018
3. December 31, 2018
4. December 31, 2018
Federal will report the bonds among its liabilities in the December 31, 2018,
balance sheet at $740,615,924:
Balance Jan. 1 $739,814,813
Exercise 14–14
1. National Equipment Transfer Corporation
IgWig
2. National Equipment Transfer Corporation
IgWig
Exercise 14–15
The 2018 interest expense is overstated by the extra interest recorded in
February. Similarly, retained earnings is overstated the same amount because 2017
interest expense was understated when the accrued interest was not recorded.
To correct the error:
*$73,200 x 1/6
2018 adjusting entry:
ENTRIES THAT SHOULD HAVE BEEN RECORDED:
December, 31, 2017 adjusting entry:
February 1, 2018:
Interest expense (1/6 x $73,200)……………………………………… 12,200
Exercise 14–16
Requirement 1
The error caused both 2016 net income and 2017 net income to be overstated,
so retained earnings is overstated by a total of $85,000. Also, the notes payable
would be understated by the same amount. Remember, the entry to record interest
is:
So, if interest expense is understated, the reduction in the note will be too
much, causing the balance in that account to be understated.
Requirement 2
Requirement 3
The financial statements that were incorrect as a result of the error would be
retrospectively restated to report the correct interest amounts, income, and retained
Exercise 14–17
Requirement 1
¥4% x $600,000
*Present value of an ordinary annuity of $1: n = 3, i = 12% (Table 4)
** Present value of $1: n = 3, i = 12% (Table 2)
Notes payable (face amount)………………………………………
600,000
Requirement 2
Cash Effective Increase in Outstanding
Payment Interest Balance Balance
4% x Face Amount 12% x Outstanding Balance Discount Reduction
484,712
1 24,000 .12 (484,712) = 58,165 34,165 518,877
* rounded.
Requirement 3
Interest expense (market rate x outstanding balance)…………….. 58,165
Interest expense (market rate x outstanding balance)…………….. 62,265
Interest expense (market rate x outstanding balance)……………….. 66,858
0
Exercise 14–18
Requirement 1
Interest $24,000¥x 2.40183 * = $ 57,644
¥4% x $600,000
*Present value of an ordinary annuity of $1: n = 3, i = 12% (Table 4)
** Present value of $1: n = 3, i = 12% (Table 2)
Notes receivable (face amount)……………………………………… 600,000
Discount on notes receivable (difference)…………………….
Requirement 2
Cash Effective Increase in Outstanding
Payment Interest Balance Balance
4% x Face Amount 12% x Outstanding Balance Discount Reduction
484,712
* rounded.
Exercise 14–18 (concluded)
Requirement 3
Cash (stated rate x face amount)……………………………………….. 24,000
Notes receivable……………………………………………………..