The before-tax income for Hawks Corp. for 2016 was $101,000; for 2017, it was $77,400. However, the accountant noted that the following errors had been made:

1. Sales for 2016 included $38,200 that had been received in cash during 2016, but for which the related products were delivered in 2017. Title did not pass to the purchaser until 2017.

2. Ending inventory on December 31, 2016 was understated by $8,640. The December 31, 2017 Ending inventory has not yet been adjusted to the Inventory account.

3. The bookkeeper, in recording interest expense for both 2016 and 2017 on bonds payable, made the following entry each year:

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, 2016, to yield an effective interest rate of 7%. (Use the effective interest method.)

4. Ordinary repairs to equipment had been charged in error to the Equipment account during 2016 and 2017. In total, repairs in the amount of $8,500 in 2016 and $9,400 in 2017 were charged in this way. The company applies a rate of 10% to the balance in the Equipment account at year end in determining its depreciation charges.

Assume that Hawks Corp. applies IFRS.

Instructions

(a) Prepare a schedule showing the calculation of corrected income before tax for 2016 and 2017. 

(b) Prepare the journal entries that the company's accountant would prepare in 2017, assuming the errors are discovered while the 2017 books are still open. Ignore income tax effects.

(c) From the perspective of an investor, comment on the quality of Hawks Corp.'s earnings as reported in 2016 and 2017.