Question

Assume you are the accountant for Austin Industries. Ellis Austin, the owner of the company, is in a hurry to receive the financial statements for the year ended December 31, 2019, and asks you how soon they will be ready. You tell him you have just completed the trial balance and are getting ready to prepare the adjusting entries. Mr. Austin tells you not to waste time preparing adjusting entries but to complete the worksheet without them and prepare the financial statements based on the data in the trial balance. According to him, the adjusting entries will not make that much difference.
The trial balance shows the following account balances:

Prepaid Rent $ 42,000
Supplies 18,000
Building 210,000
Accumulated Depreciation—Building 16,800

If the income statement were prepared using trial balance amounts, the net income would be $95,560. A review of the company’s records reveals the following information:
1. Rent of $42,000 was paid on July 1, 2019, for 12 months.
2. Purchases of supplies during the year totaled $18,000. An inventory of supplies taken at year-end showed supplies on hand of $2,720.
3. The building was purchased three years ago and has an estimated life of 30 years.
4. No adjustments have been made to any of the accounts during the year.

Answer 1

Answer:

Once you make the proper adjustments, the income statement should no longer show a $95,560 profit, instead it should show $55,080

Explanation:

1. Rent of $42,000 was paid on July 1, 2019, for 12 months.

December 31, 2019, adjusting entry on prepaid rent

Dr Rent expense 21,000

    Cr Prepaid rent 21,000

So rent expense must increase by $21,000

2. Purchases of supplies during the year totaled $18,000. An inventory of supplies taken at year-end showed supplies on hand of $2,720.

December 31, 2019, adjusting entry on supplies inventory

Dr Supplies expense 15,280

    Cr Supplies 15,280

So supplies expense must increase by $15,280

3. The building was purchased three years ago and has an estimated life of 30 years (total accumulated depreciation for 3 years = $21,000)

December 31, 2019, adjusting entry on building depreciation

Dr Depreciation expense 4,200

    Cr Accumulated depreciation - building 4,200

So depreciation expense must increase by $4,200

Adjusted income statement should be:

budgeted profit $95,560

- rent expense ($21,000)

- supplies expense ($15,280)

- depreciation expense ($4,200)

net income after adjustments = $55,080