Question

A company has a fiscal year-end of December 31: (1) on October 1, $16,000 was paid for a one-year fire insurance policy; (2) on June 30 the company advanced its chief financial officer $14,000; principal and interest at 8% on the note are due in one year; and (3) equipment costing $64,000 was purchased at the beginning of the year for cash. Depreciation on the equipment is $12,800 per year. If the adjusting entries were not recorded, would net income be higher or lower and by how much? Answer is complete but not entirely correct. Net income would be higher by $ 16,000

Answer 1

Insurance expense from October 1 to December 31 = 16,000 x 3/12

= $4,000

Interest revenue from June 30 to December 31 = 14,000 x 8% x 6/12

= $560

Depreciation expense = $12,800

If adjusting entries were not recorded, Net income would be higher by = 4,000+12,800-560

= $16,240

Net Income would be

Higher

$16,240

Kindly comment if you need further assistance.

Thanks‼!