Question

During the course of your examination of the financial statements of Trojan Corporation for the year ended December 31, 2018, you come across several items needing further consideration. Currently, net income is $88,000.

A. An insurance policy covering 12 months was purchased on October 1, 2018, for $16,800. The entire amount was debited to Prepaid Insurance and no adjusting entry was made for this item in 2018.
B. During 2018, the company received a $2,800 cash advance from a customer for services to be performed in 2019. The $2,800 was incorrectly credited to Service Revenue.
C. There were no supplies listed in the balance sheet under assets. However, you discover that supplies costing $2,150 were on hand at December 31, 2018.
D. Trojan borrowed $58,000 from a local bank on September 1, 2018. Principal and interest at 12% will be paid on August 31, 2019. No accrual was made for interest in 2018.
Required:
Using the information in a. through d. above, determine the proper amount of net income as of December 31, 2018.

Answer 1

Answer: $‭80,830‬

Step-by-step explanation:

A. 3 months of this insurance should have been for the year:

= 3/12 * 16,800

= $4,200

This should be treated as an expense.

B. The services have not yet being performed so this should not be recognized as revenue but rather as Unearned revenue. It has to be deducted from Net income.

C. These supplies should have been treated as assets but they were treated as expenses. They need to be added back to the net income to correct it.

D. The interest for the 4 months of the year from September to December should have been recorded.

= 58,000* 4/12 * 12%

= $2,320

This should be treated as an expense.

Adjusted Net income = 88,000 - 4,200 - 2,800 - 2,320 + 2,150

= $‭80,830‬