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Calculator For the year ending December 31, Orion, Inc. mistakenly omitted adjusting entries for (1) $1,500 of supplies that
Adjusted Trial Balance December 31 Cash 6,042 2,900 Accounts Receivable Prepaid Expenses Equipment 706 13,482 Accumulated Dep
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Answer #1

For the Year Ending December 31, Orion Inc., mistakenly omitted Adjusting Entries, so Preparing Adjusting Entries first and then show the effect on Revenue, Expenses and Net Income:-

Adjusting Entries

Date Accounts Title Debit Credit
December 31 (1) Supplies Expense $1,500
Supplies $1,500
December 31 (2) Unearned Revenue $4,200
Revenue $4,200
December 31 (3) Insurance Expense $5,000
Prepaid Insurance $5,000

Effect on Expenses:- Supplies Expense of $1,500 and Insurance Expense of $5,000 mistakenly omitted, these Expenses not include in Company's Trial Balance. So the Expenses are understated by $6,500 ($1,500+$5,000).

Effect on Revenue:- An Increase in Revenue of $4,200 not shown ,so the Revenues are understated by $4,200.

Effect on Net Income:- Net Income is a difference between Revenues and Expenses.

Net Income=(Revenues - Expenses)

=($4,200-$6,500)

=-$2,300

This amount of difference between Revenues and Expenses not include in Net Income and amount ($2,300) Decrease the Net Income,So Net Income are Overstated by $2,300.

(2) Calculations for Ending balance of Retained Earnings:-

Before Calculating the Ending Balance of Retained Earnings, we need to calculate Net Income, so we prepare Income Statement and the prepare Statement of Retained Earnings:-

Income Statement

December 31

Accounts Amount Amount
Fees Earned $6,778
Less:- Expenses
Wages Expense $2,857
Rent Expense 827
Utilities Expense 311
Depreciation Expense 216
Miscellaneous Expense 101
Total Expenses $(4,312)
Net Income $2,466

Statement of Retained Earnings

December 31

Accounts Amount
Retained Earnings, Beginning $10,968
Add:- Net Income 2,466
$13,434
Less:- Dividends (608)
Retained Earnings, Ending $12,826

Ending Balance of Retained Earnings is $12,826, so the Answer is Option (c) .

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