The Effect of Adjustments
Assume you are the accountant for Hatten Industries. Billy Hatten, the owner of the company, is in a hurry to receive the financial statements for the year ended December 31, 2010, and asks you how soon they will be ready. You tell him you have just completed the trial balance and are getting ready to prepare the adjusting entries. Mr. Hatten tells you not to waste time preparing adjusting entries but to complete the worksheet without them and prepare the financial statements based on the data in the trial balance. According to him, the adjusting entries will not make that much difference. The trial balance shows the following account balances:
Prepaid Rent | $ 21,000 |
Supplies | 9,000 |
Building | 210,000 |
Accumulated Depreciation—Building | 16,800 |
If the income statement were prepared using trial balance amounts, the net income would be $82,500.
A review of the company’s records reveals the following information:
1. Rent of $21,000 was paid on July 1, 2010, for 12 months.
2. Purchases of supplies during the year totaled $9,000. An inventory of supplies taken at year-end showed supplies on hand of $1,750.
3. The building was purchased three years ago and has an estimated life of 25 years.
4. No adjustments have been made to any of the accounts during the year.
Write a memo to Mr. Hatten explaining the effect on the financial statements of omitting the adjustments. Indicate the change to net income that results from the adjusting entries.
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