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Error in Amortization Schedule

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Wilkins Food Products, Inc. acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of the machine on January 1, 2004. 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 2006. The error had caused Wilkins to understate expense by $45,000 in 2004 and $40,000 in 2005.
Required:
1. Determine which accounts are incorrect as a result of these errors at January 1, 2006, before any adjustments. Explain your answer. (Ignore income taxes)
2. Prepare a journal entry to correct the error.
3. What other step(s) would be taken in connection with the error.

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Solution Summary

The solution discusses the error in the amortization schedule.

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1. The interest expense is understated by $45,000 and $40,000=$85,000. This would mean that net income would be overstated by $85,000. The understatement of interest expense would lead to understatement of notes payble. The journal entry for interest payment is
Interest expense ...

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