The before-tax income for Luanne Hensall Corp. for 2010 was $101,000; for 2011, it was $77,400. However, the accountant noted that the following errors had been made:
1. Sales for 2010 included $38,200 that had been received in cash during 2010, but for which the related products were delivered in 2011. Title did not pass to the purchaser until 2011.
2. The inventory on December 31, 2010, was understated by $8,640.
3. The bookkeeper, in recording interest expense for both 2010 and 2011 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, 2010, 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 2010 and 2011. In total, repairs in the amount of $8,500 in 2010 and $9,400 in 2011 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 Luanne Hensall Corp. applies IFRS.
Instructions
(a) Prepare a schedule showing the calculation of corrected income before taxes for 2010 and 2011.
(b) Prepare the journal entries that the company’s accountant would prepare in 2011, assuming the errors are discovered while the 2011 books are still open. Ignore income taxes.