Concept explainers
Introduction: Each financial transaction or economic event will affect either assets, liabilities, or owners’ equity. Thus, the basis for recording the transaction in the accounting system depends on the
Adjustments: Accrual basis accounting requires a number of adjustments at the end of the period. The adjustment is made for unearned revenue, accrued expenses, revenue received in advance and prepaid expenses.
The net income that K Corporation will report after adjustments.
Answer to Problem 4.1.2P
K Corporation will report a net income of $16,490 after adjustments.
Explanation of Solution
The net income of K Corporation after adjustments is calculated as follows:
K CorporationIncome statementFor the month ended March 31, 2017 | |
Particular | Amount ($) |
Net income before adjustments | 23,000 |
Add: | |
Customer revenue | 1,200 |
Rent revenue | 2,500 |
Less: | |
(800) | |
Supplies expense | (660) |
Interest expense | (100) |
Wages | (4,750) |
Federal income tax | (3,900) |
Net income after adjustments | 16,490 |
Working notes:
a. Adjustment for Notes payable
90 days note taken for $15,000 at 8 per cent on March 1, 2017. The interest expense should be recognized for one month. The interest expense is calculated as follows:
It is assumed that the number of days in a year is 360 and the number of days in March is 30.
b. Adjustment for supplies used during the year
Particular | Amount ($) |
Supplies in hand on March 1, 2017 | 1,280 |
Add: Supplies purchased during the month | 750 |
Less: Supplies in hand at the end of March 31, 2017 | (1,370) |
Supplies consumed | 660 |
c. Adjustment for the office equipment purchased last year
Monthly depreciation expense is calculated as follows:
d. Adjustment for wages payable
As wages are paid every Sunday and month-end is Friday only five days from Monday to Friday require adjustment. The wages for five days are calculated as follows:
e. Adjustment for rent collected in advance
Rent is received on February 1, 2017, for six months. The number of months from March 1 to March 31 is one. Therefore, the rental income will be recorded for one month. The rent revenue is calculated as follows:
f. Adjustments for customer paid in advance.
Customer deposits for $4,800 received on March 1, 2017, to be used for four months.
As K Corporation, closes account every month therefore, deposits of one month from March 1 to March 31 can be used. The revenue for one month is calculated as follows:
g. Adjustments for income tax
The amount of federal income tax expense during March is $3,900. It will be deducted in calculating the net income of the company.
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Chapter 4 Solutions
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