Question

On December 31, 2017, J. Alan and Company prepared an income statement and balance sheet but failed to take into account four adjusting journal entries. The income statement, prepared on this incorrect basis, reported income before income tax of $42,000. The balance sheet (before the effect of income taxes) reflected total assets of $126,000, total liabilities of $56,000, and shareholders' equity of $70,000. The data for the four adjusting journal entries follow: a. Depreciation of $11,200 for the year on equipment was not recorded. b. Wages amounting to $23.800 for the last three days of December 2017 were not paid and not recorded (the next payroll will be on January 10, 2018). c. Rent revenue of $6,720 was collected on December 1, 2017, for office space for the three-month period December 1, 2017, to February 28, 2018. The $6,720 was credited in full to Deferred rent revenue when collected. d. Income taxes were not recorded and paid. The income tax rate for the company is 30 percent. Required

As soon as possible

Answer 1

Solution:

Items		Net Income	Total Assets	Total Liabilities	Shareholders` Equity
Amounts reported		$        42,000	$        126,000	$               56,000	$                           70,000
a.	Effect of depreciation	$     (11,200)	$        (11,200)	$                        -	$                        (11,200)
b.	Effect of wages	$     (23,800)		$               23,800	$                        (23,800)
c.	Effect of rent revenue	$          2,240	$                   -	$               (2,240)	$                             2,240
Adjusted balances		$          9,240	$        114,800	$               77,560	$                           37,240
d.	Effect of Income Taxes	$        (2,772)	$                   -	$                 2,772	$                           (2,772)
Correct amounts		$          6,468	$        114,800	$               80,332	$                           34,468

Notes:

1) All amounts are round off to nearest dollar amount.

2) Depreciation decreases the net income, equity and assets(through accumulated depreciation increase)

3) Wages increase liabilities through wages payable and decrease net income and equity.

4) Rent revenue increases net income and equity but decreases the unearned revenue(liability) which is created on December 1st.

5) Income tax increase liabilities through income tax payable and decrease net income and equity.