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18 July, 07:44

A company has a fiscal year-end of December 31: (1) on October 1, $19,000 was paid for a one-year fire insurance policy; (2) on June 30 the company advanced its chief financial officer $17,000; principal and interest at 7% on the note are due in one year; and (3) equipment costing $67,000 was purchased at the beginning of the year for cash. Depreciation on the equipment is $13,400 per year. If the adjusting entries were not recorded, would net income be higher or lower and by how much?

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  1. 18 July, 08:17
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    Net income will be higher for 17,555 if these transactions are not recorded

    Explanation:

    (1) expired insurance:

    we multiply the contract by the expred portion, which is 3 months (Oct Nov and Dec)

    19,000 = 1 year = 12 months

    acrued: 3 months

    19,000 x 3/12 = 4,750 insurance expense

    (2) interest revenue on note receivable

    principal x rate x time

    we must multiply by half a year which is the accrued time between June 30th to December 31th

    17,000 x 7% x 6/12 = 595 interest revenue

    (3) depreciation 13,400

    Total adjustment variation in net income:

    interest revenue 595

    insurance expense (4,750)

    depreciation expense (13,400)

    net income (17, 555)
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