Upon inspection of the records of Ally Company, the following facts were discovered for the year ended December 31, 2017. A fire insurance premium of 120,000 was paid and charged as insurance expense for 2017. The fire insurance policy covers one year from April 1, 2017. Inventory on January 1, 2017 was overstated by 80,000. Inventory on December 31, 2017 was overstated by 120,000. Taxes of 60,000 for the fourth quarter of 2017 were paid on January 20, 2018 and charged as expense of 2018. On December 5, 2017 a cash advance of 90,000 by a customer was received for goods to be delivered in January 2018. The amount of 90,000 was credited to sales. The gross profit on sales is 40%. Net income for the year before any adjustments is 1,550,000.
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
If the errors were discovered in January 2018, what must be the entry to adjust 2017 Net Income/
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