1 Exercise 2-17 Accrual accounting income determination [LO2-4, 2-8) During the

ID: 2332263 • Letter: 1

Question

1 Exercise 2-17 Accrual accounting income determination [LO2-4, 2-8) During the course of your examination of the financial statements of the Hales Corporation for the year ended December 31, 2018, you a. An insurance polilcy covering three years was purchased on January 1, 2018, for $4.800. The entire amount was debited to 10 points expense and no adjusting entry was recorded for this Item. b. During 2018, the company receved a $725 cash advance from a customer for merchandise to be manufactured and shipped In 2019. The $725 was credited to sales revenue. No entry was recorded for the cost of merchandise c. There were no supples listed In the balance sheet under assets. However, you discover that supplies costing $715 were on hand at 31. $1 a local bank on October 1, 2018, Principal and interest at 12% will be paid on September 30, 2019 NO accrual was recorded f e. Net Income reported In the 2018 income statement is $35,000 before reflecting any of the above Items. Determine the proper amount of net Income for 2018. (Amounts to be deducted should be Indicated by a minus sign.)

Explanation / Answer

Answers

Unadjusted Net Income

$ 35,000.00

Adjustments:

Insurance Expense

$ 3,200.00

Sales revenue

$ (725.00)

Supplies expense

$ 715.00

Interest Expense

$ (570.00)

Adjusted Net Income

$ 37,620.00

---Adjustment ‘a’: It says Insurance expense has been debited by $ 4800. This $4800 is for 3 years insurance. Correct accounting should be that only 2018’s expense (4800/3 years) should be debited to Insurance expense. Hence, expense of $ 3200 [for other 2 Years) needs to be credited. When expense is credited, the Net Income gets Increased, hence amount is added. [4800 x 2/3 = 3200]

---Adjustment ‘b’: Amount is received but the sales will be made in next year (2019). Sales revenue cannot be recorded unless it is earned. Since sales is not made in 2018, Sales revenue is not yet earned. Hence the amount credited to Sales revenue needs to be debited. When a revenue account is debited, the Net Income decreases, hence the amount is deducted.

---Adjustment ‘c’: Physical count states that $ 715 of supplies were on hand, but Balance sheet shows no record. This means that whole of Supplies are debited to Supplies Expense account. TO correct this, Supplies are to be debited by $ 715 and Supplies expense is to be credited by $ 715. Crediting an expense account Increases Net Income, hence the amount is Added.

---Adjustment ‘d’: Interest is accrued for 3 months (Oct to Dec) on $ 19000. Interest expense = $ 19000 x 12% x 3/12 = $ 570. Recording of this unrecorded expense will decrease Net Income, hence the same is Deducted.