Question

value 5.00 points 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 $80,000 a. An insurance policy covering 12 months was purchased on October 1, 2018, for $12,000. The entire amount was debited to Prepaid Insurance and no adjusting entry was made for this item in 2018 b. During 2018, the company recelved a $2,000 cash advance from a customer for services to be performed in 2019. The $2,000 was incorrectly credited to Servico Revenue. C. There were no supplies isted in the balance sheet under assets. However, you discover that supplies costing $1,750 were on hand at December 31, 2018. d. Trojan borrowed $50,000 from a local bank on September 1 2018. Princpal and interest at 12% will be paid on August 31 2019 No accrual was made for interest in 2018 Required: Using the information in through d above detemine the proper amount of net income as of December 31, 2018. Amounts to be deducted should be indicated with a minus sign. Net income (unadjusted) a. Adjustment for insurance b. Adjustment for deferred revenue c. Adjustment for supplies d. Adjustment for interest Net income (adjusted)

Answer 1

ANSWER:

Net income (unadjusted)	80,000
a. Adjustment for insurance	-3,000
b. Adjustment for deferred revenue	-2,000
c. Adjustment for supplies	1,750
d. Adjustment for interest	-2,000
Net income (adjusted)	74,750

Working:

Net income (unadjusted)	80,000
Record insurance expense of $1,000 per month	-3,000
Reclassify service revenue as unearned revenue (liability)	-2,000
Reclassify supplies expense as supplies (asset)	1,750
Record interest expense of $500 per month ($50,000 * 12% * 4/12)	-2,000
Net income (adjusted)	74,750