The before-tax income for Hawks Corp. for 2019 was $101,000; for 2020, it was $77,400. However, the accountant noted that the following errors had been made: 1. Sales for 2019 included $38,200 that had been received in cash during 2019, but for which the related products were delivered in 2020. Title did not pass to the purchaser until 2020. 2. Ending inventory on December 31, 2019, was understated by $8,640. The December 31, 2020 ending inventory has not yet been adjusted to the Inventory account. Assume that Hawks has a periodic inventory system and that no adjustment has been made to the opening balance of the Inventory account. 3. The bookkeeper, in recording interest expense for both 2019 and 2020 on bonds payable, made the following entry each year: 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, 2019, 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 2019 and 2020. In total, repairs in the amount of $8,500 in 2019 and $9,400 in 2020 were charged in this way. The company uses the declining balance method and applies a rate of 10% 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 2019 and 2020.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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The before-tax income for Hawks Corp. for 2019 was $101,000; for 2020, it was $77,400. However, the.

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The before-tax income for Hawks Corp. for 2019 was $101,000; for 2020, it was $77,400. However, the accountant noted that the following errors had been made:

1. Sales for 2019 included $38,200 that had been received in cash during 2019, but for which the related products were delivered in 2020. Title did not pass to the purchaser until 2020.
2. Ending inventory on December 31, 2019, was understated by $8,640. The December 31, 2020 ending inventory has not yet been adjusted to the Inventory account. Assume that Hawks has a periodic inventory system and that no adjustment has been made to the opening balance of the Inventory account.
3. The bookkeeper, in recording interest expense for both 2019 and 2020 on bonds payable, made the following entry each year:

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, 2019, 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 2019 and 2020. In total, repairs in the amount of $8,500 in 2019 and $9,400 in 2020 were charged in this way. The company uses the declining balance method and applies a rate of 10% 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 2019 and 2020.
b. Prepare the journal entries that the company's accountant would prepare in 2020, assuming the errors are discovered while the 2020 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 2019 and 2020.

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