Question

Exercise 3-5A Determine the amount of net income (LO3-1) During the course of your examination of the financial statements of Trojan Corporation for the year ended December 31, 2021, you come across several items needing further consideration. Currently, net income is $81,000. 1. An insurance policy covering 12 months was purchased on October 1, 2021, for $12,600. The entire amount was debited to Prepaid Insurance and no adjusting entry was made for this item in 2021. 2. During 2021, the company received a $2,100 cash advance from a customer for services to be performed in 2022. The $2,100 was incorrectly credited to Service Revenue. 3. There were no supplies listed in the balance sheet under assets. However, you discover that supplies costing $1,800 were on hand at December 31, 2021. 4. Trojan borrowed $51,000 from a local bank on September 1, 2021. Principal and interest at 9% will be paid on August 31, 2022. No accrual was made for interest in 2021. Required: Using the information in 1 through 4 above, determine the proper amount of net income as of December 31, 2021. (Do not round intermediate calculations. Amounts to be deducted should be indicated with a minus sign.) Net income (unadjusted) 1. Adjustment for insurance 2. Adjustment for deferred revenue 3. Adjustment for supplies 4. Adjustment for interest Net income (adjusted)

Answer 1

Trojan Corporation

1. Insurance to be debited as Expense be from October to December i.e.. 3 months

So, Insurance Expense = $12,600 * 3 / 12

                                   = $ 3150

This insurance expese of $3,150 should be deducted from net income

2. The advance recieved for the services to be performed in next year is unearned revenue hence $2,100 cash advance should be deducted from net income

3. The supplies in hand will increse the the net income of the corporation so it should be added to the existing net income

4. Interest on loan for the period September 1,2021 to December 31, 2021 ( 4 months) should be debited as expense.

Accrued Interest = $51,000 * 4/12 * 9%

                         = $1,530

This interest should be deducted from existing net income

Particulars	Amount
Net income ( Unadjusted )	$81,000
1. Adjustment for insurance	-$3,150
2. Adjustment for deferred Revenue	-$2,100
3. Adjustment for supplies	$1,800
4. Adjustment for interest	-$1,530
Net Income ( Adjusted )	$76,020