Question

A company has a fiscal year-end of December 31: (1) on October 1, $19,000 was paid for a one-year fire insurance policy; (2) on June 30 the company advanced its chief financial officer $17,000; principal and interest at 7% on the note are due in one year; and (3) equipment costing $67,000 was purchased at the beginning of the year for cash. Depreciation on the equipment is $13,400 per year. If the adjusting entries were not recorded, would net income be higher or lower and by how much?

Answer 1

Answer:

Net income will be higher for 17,555 if these transactions are not recorded

Explanation:

(1) expired insurance:

we multiply the contract by the expred portion, which is 3 months (Oct Nov and Dec)

19,000 = 1 year = 12 months

acrued: 3 months

19,000 x 3/12 =  4,750 insurance expense

(2) interest revenue on note receivable

principal x rate x time

we must multiply by half a year which is the accrued time between June 30th to December 31th

17,000 x 7% x 6/12 = 595 interest revenue

(3) depreciation 13,400

Total adjustment variation in net income:

interest revenue                   595

insurance expense           (4,750)

depreciation expense     (13,400)

  net income                    (17, 555)