Question

During your examination of the financial statements of Martin Mfg. Co for the year ended Dec 31, 2020, you discover the following:
1. An insurance policy covering 3 years purchased on Jan 1, 2020, for 14,000. The entire amount was debited to Insurance expense.
2. On November 1, 2020, Martin Mfg received a 7000 cash advance for 3 months rent. The 7000 was credited to rent revenue.
3. Net income reported in the 2020 income statement is 27,000 not including above items.
Determine the correct amount of net income, disregard taxes.
Please show your work.

Answer 1

For point 1

Prepaid Insurance A/C Dr. 9,333

To Insurance Expense A/C 9,333

For Point 2

Rent revenue A/C Dr. 7,000

To Unearned revenue A/C 7,000

Since in point 1 only account has shifted but expense still exixt therefore there will be no chance in the net income.

In point 2 Revenue account has just shifted from rent revenue to unearned revenue but still it has been treated as revenue therefore it will be included in the other income and hence on chance will be their in net income

Therefore Net Income 27,000 remain same even after these mistake are undertaken.