Natasha‘s Product, Inc,. acquired a packaging machine from Coffee Inc on January 1, 2009. In payment for the machine Natasha issued a three year installment note to be paid in three equal payment at the end of each year. The payment include interest at rate 10%. Coffee Inc made a conceptual error in preparing the amortization schedule, which Natasha's failed to discover until 2011. The error had cause Natasha to understand interest expenses by $45,000 in 2009 and 40,000 in 2010.

Required:

1- Determine which account are incorrect as a result of these errors at January 1,2011, 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?

Requirement 1

The error caused both 2009 net income and 2010 net income to be overstated, so retained earnings is overstated by a total of $85,000. In addition, the note payable would be understated by the same amount. Remember, the entry to record interest is:

Interest expense...................................................................................... xxx
Note payable (difference).......................................................... xxx
Cash............................................................................. xxx

So, if interest expense is understated, the reduction in the note will be too much, causing the balance in that account to be understated.

American, Inc

American Inc., acquired a packaging machine from Barton and Barton Corp. Barton and Barton completed construction of the machine on January 1, 2011. In payment for the$4 million machine, American Inc. issued a four-year installment note to be paid in for equal payment at the end of each year. The payment include interest at the rate of 10%

REQUIRED:

1-Prepare the Journal entry for American purchase of the machine on January 1, 2011.

2-Prepare an amortization schedule for the four-year of the term installment note.

3-Prepare the Journal entry for the first installment payment on December 31, 2011

4-Prepare the Journal entry for the third installment payment on Dec, 2013.

SEE THE FIRST STEP BELOW

1. January 1, 2011
Machinery.................................................................... 4,000,000
Notes payable........................................................... 4,000,000

The next step would be to create and amortization schedule.

Lisco Medical lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians' Leasing purchased a lithotripter from Sect for $2,000,000 and leased it to
Dept of Urologists Group, Inc., on January 1, 2011
Lease Description:
Quarterly lease payment $130,516-beginning of each period
Lease term 5 years (20 quarters)
No residual value, no BPO
Economic life of lithotripter 5 years
Implict interest rate and lessee's incremental borrowing rate 12%
Fair Value of asset $2,000,000

Collectibility of the lease payment os reasonably assured and there are no lessor cost yet incurred.

REQUIRED:

1- How should this lease be classified by Dept of Urologists and by Physians' Leasing?

2- Prepare appropriate entries for both Dept of Urologist and Physians' Leasing from the inception of the lease through the second rental payment on April 1, 2011. Depreciation is recorded at the end of each fiscal year (Dec 31).