Question

A company had calculated net income to be $77,850 based on the unadjusted trial balance. The following adjusting entries were then made for: Salaries and wages owed but not yet paid of $820 Interest earned but not received from investments of $780 Prepaid insurance premiums amounting to $580 have expired Unearned revenue in the amount of $780 has now been earned.

Answer 1

Answer:

Adjusted net income will be $78,010

Explanation:

According to the Accrual concept all the accrued expenses should be recognized and deducted from the unadjusted net income and all the earned revenues should be recognized and added to unadjusted net Income.

Salaries and wages owed but not yet paid of $820 is an expense which is accrued but not been paid it should be recorded and deducted from the unadjusted net income as earlier expenses were understated.

Interest earned but not received from investments of $780 is the revenue recognized but not been received until now. Accrual Concept requires that when revenue is realized it should be recognized into the accounting records. So it should be added to the net income.

Prepaid insurance premiums amounting to $580 have expired is actually an accrued expense which previously recorded as prepaid expense. It should be deducted from the net income as it is a expense which need to be recognized.

Unearned revenue in the amount of $780 has now been earned. Now it should be added to the net income because it is a revenue item that should be recognized as it is recorded as unearned revenue earlier.

Net income to be $77,850 based on the unadjusted trial balance.

Adjusted Net Income = $77,850 - $820 + $780 - 580 + 780 = $78,010