Chapter 4, Problem 4.1.2P

To determine

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 accounting equation. The accounting equation is:

  $\text{Assets}\text{=}\text{Liabilities}\text{+}\text{Stockholder's}\text{Equity}$

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:
Depreciation expenses	(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:

  $\begin{array}{c}\text{Interest}\text{expense}=\text{principal}\times \text{interest}\times \frac{\text{maturity}\text{days}}{\text{days}\text{in}\text{a}\text{year}}\times \frac{\text{no}\text{.}\text{of}\text{days}\text{in}\text{March}}{\text{days}\text{till}\text{maturity}}\end{array}$

         $\begin{array}{c}=\$15,000\times 8\%\times \frac{90}{360}\times \frac{30}{90}\end{array}$

         $\begin{array}{c}=\$100\end{array}$

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

  $\begin{array}{c}\text{Depreciation}\text{=}\frac{\text{Cost}\text{of}\text{Asset}\text{-}\text{Salvage}\text{value}}{\text{Useful}\text{life}}\end{array}$

         $\begin{array}{c}=\frac{\$62,600-\$5,000}{6}\end{array}$

         $\begin{array}{c}=\$9,600\end{array}$

Monthly depreciation expense is calculated as follows:

  $\begin{array}{c}\text{Monthly}\text{depreciation}\text{=}\frac{\text{annual}\text{depreciation}}{\text{Number}\text{of}\text{months}\text{in}\text{a}\text{year}}\end{array}$

            $\begin{array}{c}=\frac{\$9,600}{12}\end{array}$

            $\begin{array}{c}=\$800\end{array}$

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:

  $\begin{array}{c}\text{Wages}\text{expense}=\text{daily}\text{wage}\times \text{number}\text{of}\text{days}\end{array}$

         $\begin{array}{c}=\$950\times 5\end{array}$

         $\begin{array}{c}=\$4,750\end{array}$

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:

  $\begin{array}{c}\text{Rent}\text{revenue}=\text{rent}\text{per}\text{month}\times \text{number}\text{of}\text{months}\end{array}$

         $\begin{array}{c}=\$2,500\times 1\end{array}$

         $\begin{array}{c}=\$2,500\end{array}$

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:

  $\begin{array}{c}\text{Revenue}\text{recognized}=\text{total}\text{deposit}\times \frac{\text{months}\text{used}}{\text{total}\text{months}}\end{array}$

           $\begin{array}{c}=\$4,800\times \frac{1}{4}\end{array}$

           $\begin{array}{c}=\$1,200\end{array}$

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.