Explanation:
The adjusting entries are shown below:
a. Insurance expense A/c Dr $210
To Prepaid insurance A/c $210
(Being the insurance expense is recorded)
The computation is shown below:
= $840 × 6 months ÷ 24 months
= $210
b. Supplies expense A/c Dr $600
To Supplies A/c $600
(Being supplies account is adjusted)
The supplies expense is computed below
= Supplies unadjusted balance - supplies on hand
= $1,000 - $400
= $600
c. Repairs and Maintenance expense A/c Dr $900
To Accrued Liabilities A/c $900
(Being the repairs and maintenance expense is recorded)
d. Accounts Receivable A/c Dr $8,450
To Service revenue A/c $8,450
(Being the contract completion is recorded)
e. Depreciation expense A/c Dr $3,250
To Accumulated depreciation A/c 3,250
(Being the depreciation expense is recorded)
f. Interest expense A/c Dr $600
To Interest payable A/c $600
(Being the interest expense is recorded)
g. Income tax expense A/c Dr $8,000
To Income tax payable A/c $8,000
(Being the income tax expense is recorded)
It is computed below:
= $40,000 × 20%
= $8,000
2. Now the net income overstated or understated is
= Expenses - revenues
where,
Expenses = $210 + $600 + $900 + $3,250 +$600 + $8,000
= $13,560
And, the revenues is $8,450
So, the net income overstated is
= $13,560 - $8,450
= $5,110
