Question

On December 31, Fawzi Company prepared an income statement and balance sheet and failed to take into account four adjusting entries. The income statement, prepared on this incorrect basis, reflected pretax income of $77,000. The balance sheet (before the effect of income taxes) reflected total assets, $179,000; total liabilities, $75,000; and stockholders' equity, $104,000. The data for the four adjusting entries follow: a. Wages amounting to $28,000 for the last three days of December were not paid and not recorded (the next payroll will be at the beginning of next year). b. Depreciation of $12,000 for the year on equipment that cost $179,000 was not recorded. c. Rent revenue of $9,900 was collected on December 1 of the current year for office space for the period December 1 to February 28 of the next year. The $9,900 was credited in full to Unearned Rent Revenue when collected. d. Income taxes were not recorded. The income tax rate for the company is 30 percent. Required: Complete the following tabulation to correct the financial statements for the effects of the four errors. (Amounts to be deducted should be indicated with a minus sign.) Items Net Income Total Assets Total Liabilities $ 75,000 Stockholders' Equity $ 104,000 $ 77,000 $ 179,000 Balances reported Additional adjustments: a. Wages b. Depreciation c. Rent revenue Adjusted balances d. Income taxes Correct balances

Answer 1

Items Net Income Total Assets Total Liabilities Stockholder's Equity 77,000 $ 179,000 $ 75,000 $ 104,000 (12,000) Balances reported $ Additional adjustments : Wages $ Depreciation $ Rent revenue $ Adjusted balances $ Income taxes @ 30% $ Correct balances | $ (28,000) (12,000) $ 3,300 40,300 $ (12,090) 28,210 $ $ 28,000 $ $ $ (3,300) $ $ 99,700 $ $ 12,090 $ $ 111,790 $ (28,000) (12,000) 3,300 67,300 (12,090) 55,210 167,000 167,000

Note : Wages, depreciation and income tax are expenses, hence they will effect the shareholder's equity. Rent revenue is an income, hence it will also effect the shareholder's equity. In the point a, due to wages expenses account, net income & shareholders equity and due to wages payableaccount, total liabilities will be effected. In the point b, due to depreciation expense, net income & shareholders equity and due to accumulated depreciation, total assets will be effected. In the point c, due to rent revenue, net income & shareholders equity and due to unearned revenue, total liabilities will be effected. In the point d, due to income tax expense, net income & shareholders equity and due to income tax payable, total liabilities will be effected.