Chapter 20, Problem 20.20E

Error corrections; investment

• LO20–6

Required:

1. Prepare the journal entry to correct the error, assuming it is discovered before the books are adjusted or closed in 2018. (Ignore income taxes.)

2. Prepare the journal entry to correct the error assuming it is not discovered until early 2019. (Ignore income taxes.)

Wilkins Food Products Inc. acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of the machine on January 1, 2016. In payment for the machine Wilkins issued a three-year installment note to be paid in three equal payments at the end of each year. The payments include interest at the rate of 10%. Lawrence made a conceptual error in preparing the amortization schedule, which Wilkins failed to discover until 2018. As a result of the error, Wilkins understated interest expense by $45,000 in 2016 and $40,000 in 2017.