Question

P3.5A

By how much would net income be misstated if the accountant neglected to perform the adjustments?

P3.5A (LO 2,3,4) On November 1, 2020, the account balances of Schilling Equipment Repair were as follows. Journalise through ac preparation GLS No. 101 Cash 112 Accounts Receivable 126 Supplies 153 Equipment Debit $ 2,400 4.250 1,800 12,000 No. 154 Accumulated Depreciation-Equipment 201 Accounts Payable 209 Unearned Service Revenue 212 Salaries and Wages Payable 311 Common Stock 320 Retained Earnings Credit $ 2,000 2,600 1.200 700 10,000 3,950 $20,450 $20,450 During November, the following summary transactions were completed. Nov. 8 10 12 15 17 20 22 25 27 29 Paid $1,700 for salaries due employees, of which $700 is for October salaries. Received $3,420 cash from customers on account. Received $3,100 cash for services performed in November. Purchased equipment on account $2,000. Purchased supplies on account $700. Paid creditors on account $2,700. Paid November rent $400. Paid salaries $1.700. Performed services on account and billed customers $1,900 for these services. Received S600 from customers for future service. Adjustment data consist of: 1. Supplies on hand $1,400. 2. Accrued salaries payable $350. 3. Depreciation for the month is $200. 4. Services related to unearned service revenue of $1.250 were performed. Instructions a. Enter the November 1 balances in the ledger accounts. b. Journalize the November transactions. c. Post to the ledger accounts. Use Jl for the posting reference. Use the following additional accounts: No. 407 Service Revenue, No. 615 Depreciation Expense, No. 631 Supplies Expense, No. 726 Salaries and Wages Expense, and No. 729 Rent Expense. d. Prepare a trial balance at November 30, e. Journalize and post adjusting entries. f. Prepare an adjusted trial balance. g. Prepare an income statement and a retained earnings statement for November and a balance sheet at November 30 d. Trialb f. Adj. tri 8. Net ing Ending earnin Totala

Answer 1

1	Supplies on hand is the closing stock which should be deducted from purchase cost. If it is not considered, expense would be overstated, resulting in understatement of income by $ 1400
2	Accrued salaries payable is shown as an addition to salaries expense in Income statement. Ignoring this will result in understatement of salaries, thereby overstatement of income by $ 350.
3	Ignoring depreciation expense will result in understatement of expenses, and thereby overstatement of income by $ 200
4	As services are performed, liability needs to be reversed by recognizing income. If it is ignored, income is not recognized resulting in understatement of revenue by $ 1250.
	Net overall effect will be Understatement by $ 1400, Overstatement by $ 350, Overstatement by $ 200, Understatement by $ 1,250, resulting in understatement of net income by $ 2100