Question

Facts: Basic Services, Inc. prepares annual financial statements and accordingly records most of the company's adjusting journal entries just once per year in December. Basic purchases 100% of the office supplies on account from vendor, Standard Company Basic provides you with the below unadjusted account balances as of 12/31/2017: Cash $24,950 Utilities Payable $0 Accounts receivable 21,700 Common stock 50,000 Prepaid Advertising Expense 0 Retained earnings 55,000 Prepaid Insurance Expense 4,020 Dividends 18,000 Office Supplies 9,000 Service Revenue 250,000 Store equipment 115,000 Advertising Expense 27,750 Office equipment 60,000 Salary Expense 118,000 Accumulated depreciation 22,000 Depreciation Expense 19,000 Accounts payable- Standard Co. 2,300 Office supplies expense 2,000 Dividends Payable 3,000 Insurance Expense Interest Payable 0 Interest expense 0 Notes payable 60,000 Miscellaneous Expense 2,815 Rent Payable 0 Rent Expense 18,700 Salaries Payable 0 Utilities Expense 7,865 Unearned Service Fees 6,500

Answer 1

Answer: D) $51,940

Working note:

Net income before adjustment	$53,870
Add: Revenue recognised for 2017(adjustment b) Explanation: The unearned service fees account shows a balance of $6,500. Since, it was an advance payment from customers prior to the performance of service, it should be treated as a current liability and no revenue is recognised. But in the adjustment, it is said that services worth $2,600 is performed during the year 2017. So, $2,600 should be recognised as revenue for the year 2017 and should be added to net income.	$2,600
Less: Interest expense (adjustment a) Explanation:Loan is borrowed on september 1 2017. Amount = $60,000 interest rate = 6% period = 9 months interest amount for 9 months = 60,000*6/100 * 9/12 = $2,700 interest amount for one month = 2,700/9 = $300 interest amount to be incurred for 2017 (4 months:september 2017 to december 2017) = 300*4 = $1,200 Since interest is an expense, it should be deducted from net income	(1,200)
Less:Insurance expense(adjustment c) Explanation: Prepaid insurance, currently an asset account shows a balance of $4,020.No insurance expense was recognised for 2017 until the adjustment. The prepaid insurance amount includes two policies 1.$ 1,950 for 6 months(from january 2017 to june 2017) 2.$2,070 for 18 months (from january 2017 to june 2018) (insurance for $2,070=12 months for 2017 and 6 months for 2018) so, insurance expense to be recognised for 2017 = 1,950 + (2,070*12/18) = 1,950+1,380 = $3,330. Since insurance is an expense, it should be reduced from net income.	(3,330)
Adjusted net income	$51,940