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A company has a fiscal year-end of december 31: (1) on october 1, $22,000 was paid for a one-year fire insurance policy; (2) on june 30 the company lent its chief financial officer $20,000; principal and interest at 6% are due in one year; and (3) equipment costing $70,000 was purchased at the beginning of the year for cash. depreciation on the equipment is $14,000 per year. if the adjusting entries were not recorded, would net income be higher or lower and by how much?

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Answer:

$18,900

Explanation:

1. Insurance expense

$5,500

($ 22000 is for 12 months.

Period till 31 Dec from 1 Oct = 3 months

3 months Insurance expense = 22000 x 3/12 = 5500)

2.Interest Revenue

($600)

(6 month interest, from 1 Jul to 31 dec

= 20000 x 6% x 6/12

= 600 Interest Revenue)

3. Depreciation expense

$14,000

Total ($14,000+$5,500-$600)

=$18,900

Therefore if the adjusting entries were not recorded, would net income be higher or lower and by $18,900

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