Question

A company has a fiscal year-end of December 31: (1) on October 1, $32,000 was paid for a one-year fire insurance policy; (2) on June 30 the company advanced its chief financial officer $30,000; principal and interest at 8% on the note are due in one year; and (3) equipment costing $80,000 was purchased at the beginning of the year for cash. Depreciation on the equipment is $16,000 per year. If the adjusting entries were not recorded, would net income be higher or lower and by how much

Answer 1

Answer:

The new income will be higher by $22,800.

Explanation:

The net income is the actual earnings of the business which is determined from the profit or loss statement by deducting all the expenses from the revenues earned.

The effect of the adjusting entries on the net income will be as follows:

1) Insurance expense will be of $8,000. It is charged for the period of three months only. This will decrease the net income.

2) Interest revenue will be of $1,200. It is charged for 6months. This will increase the net income.

3) The depreciation expense of $16,000. This will decrease the net income.

Therefore for the overall effect on the net income, if there will be no effect of the above adjustments then it will show net income by higher amount then the actual net income, by $22,800.