Question

ount of E3-5 During the course of your examination of the financial statements of Trojan Corporation for the year ended December 31, 2021, you come across several items needing further consideration. Currently, net income is $100,000. 1. An insurance policy covering 12 months was purchased on October 1, 2021, for $24,000. The entire amount was debited to Prepaid Insurance and no adjusting entry was made for this item in 2021. 2. During 2021, the company received a $4,000 cash advance from a customer for services to be performed in 2022. The $4,000 was incorrectly credited to Service Revenue. 3. There were no supplies listed in the balance sheet under assets. However, you discover that supplies costing $2,750 were on hand at December 31, 2021. 4. Trojan borrowed $70,000 from a local bank on September 1, 2021. Principal and interest at 9% will be paid on August 31, 2022. No accrual was made for interest | 2021. Required: Using the information in 1 through 4 above, determine the proper amount of net income as of December 31, 2021.

Answer 1

statement showing adjusting entries treatment

#1- prepaid insurance purchased on oct 1 2021 $24000

Its for 1 year

monthly insurance expired will we = 24000/12

= 2000

so insurance expired for 3 months till 31 dec 2021= 3*2000

=6000

$ 6000 will be treated as expense for the year 2021 as insurance expenses expired,

and reduce the prepaid insurance balance to $ 18000 (24000-6000)

#2- cash advance of $ 4000 received for  services to performed will be deducted from net income of $100000

#3- supplies are not present in balance sheet as on 31 st dec 2021,

however we have 2750 supplies in hands , this means $2750 supplies are wrongly debited as supplies consumed in income & statement thus reducing income , as this will added again in net income

and balance sheet will have supplies = $2750

#4-loan interest = 70000*4/12*9/100

=$ 2100

as accrual interest for 4 months of 2021 = $2100

so it will be deducted from income

Calculation of net Income after adjustment

particulars	amount($)
net income before adjustments	100000	explanation
less insurance expense expired	-6000	#1
less revenue received for the year 2022	-4000	#2
add supplies expense	2750	#3
less accrual interest for year 2021	-2100	#4
net income after adjustment	90650