Question

During the course of your examination of the financial statements of the Hales Corporation for the year ended December 31, 2021, you discover the following:

a. An insurance policy covering three years was purchased on January 1, 2021, for $2,400. The entire amount was debited to insurance expense and no adjusting entry was recorded for this item.
b. During 2021, the company received a $525 cash advance from a customer for merchandise to be manufactured and shipped in 2022. The $525 was credited to sales revenue. No entry was recorded for the cost of merchandise.
c. There were no supplies listed in the balance sheet under assets. However, you discover that supplies costing $435 were on hand at December 31.
d. Hales borrowed $11,000 from a local bank on October 1, 2021. Principal and interest at 12% will be paid on September 30, 2022. No accrual was recorded for interest.
e. Net income reported in the 2021 income statement is $26,000 before reflecting any of the above items.
Required: Determine the proper amount of net income for 2021. (Amounts to be deducted should be indicated by a minus sign.) Unadjusted net income Adjustments: a. b. Adjusted net income

Answer 1

Adjusted Net Income = $27,180

Step-by-step explanation:

Calculation of the proper net income

Un-adjusted net income $26,000

Adjustments

+ Adjustment of insurance expense $1,600 ($2400 * 2/3)

- Adjustment of sales revenue $525

+ Adjustment of supplies $435

- Adjustment of interest $330U ($11,000 * 12% * 3/12)

Correct and Adjusted Net Income $27,180