Question

During the course of your examination of the financial statements of Trojan Corporation for the year ended December 31, 2018, you come across several items needing further consideration. Currently, net income is $85,000. a. An insurance policy covering 12 months was purchased on October 1, 2018, for $15,000. The entire amount was debited to Prepaid Insurance and no adjusting entry was made for this item in 2018. b. During 2018, the company received a $2,500 cash advance from a customer for services to be performed in 2019. The $2,500 was incorrectly credited to Service Revenue. c. There were no supplies listed in the balance sheet under assets. However, you discover that supplies costing $2,000 were on hand at December 31, 2018. d. Trojan borrowed $55,000 from a local bank on September 1, 2018. Principal and interest at 12% will be paid on August 31, 2019. No accrual was made for interest in 2018. Required: Using the information in a. through d. above, determine the proper amount of net income as of December 31, 2018. (Amounts to be deducted should be indicated with a minus sign.)

Answer 1

Answer: The proper amount of net income as at December 31, 2018 is $58,750.

Explanation: Trojan Corporation adjusted net income for the year ended 31 December 2018 would be as follows:

Net income (unadjusted) - $85,000

a) Adjust for amortization of prepaid insurance of $1,250 per month ($15,000/12 * 3) - (3,750)

b) Reclassify service revenue to unearned revenue (liability) - (2,500)

c) Reclassify supplies expense to supplies (asset) - (2,000)

d) Adjust for interest expense of $550 per month (12% of $55,000 * 4 / 12) - (2,200)

Net income (adjusted) - $58,750