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 $100,000.

A. An insurance policy covering 12 months was purchased on October 1, 2018 for $24,000. 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 $4,000 cash advance from a customer for services to be performed in 2019. The $4,000 was incorrectly credited to Service Revenue.

C. There were no supplies listed in the balance sheet under assets. However, you discover that supplies costing $2,750 were on hand at December 31, 2018.

D. Trojan borrowed $70,000 from a local bank on September 1, 2018. Principal & interest at 9% will be paid on August 31, 2019. No accrual was made for interest in 2018.

Using the information in A through D above, determine the proper amount of net income as of December 31, 2018.

Answer 1

Answer:

Adjusted Net Income for the year ended 31 December 2018 is $90,650  

Explanation:

                                            Trojan Corporation

        Adjusted Income Statement for the year ended 31 December 2018

Un-adjusted Net Income                                          $100,000  

 

Insurance Expense - Understated                          $(6,000)

3 months impact = ($24,000 × 3 ÷ 12)  

Sales Revenue - Overstated                                          $(4,000)

 

Supplies on hand at 31 December 2018                  $2,750  

 

Interest Expense                                                          $(2,100)

9 months impact = ($70,000 × 9% × 4 ÷ 12)  

Adjusted Net Income for the year

ended 31 December 2018                                          $90,650  

Answer 2

Adjusted Net Income for the year ended 31 December 2018 is $90,650

What is an adjusted net income?

Adjusted net income represents a business's earnings after expenses.

                             Trojan Corporation

Adjusted Income Statement for the year ended 31 December 2018

Un-adjusted Net Income                                          $100,000  

Insurance Expense - Understated                           ($6,000)  

Sales Revenue - Overstated                                     ($4,000)

Supplies on hand at 31 December 2018                  ($2,750)  

Interest Expense                                                        ($2,100)

Adjusted Net Income for the year ended             ($90,650)

Calculations:

Insurance Expense - Understated

3 months impact

= ($24,000 × 3 ÷ 12)  

= $6,000

Interest Expense                                                      

9 months impact

= ($70,000 × 9% × 4 ÷ 12)

= ($2,100)

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