Acompany has a fiscal year-end of december 31: (1) on october 1, $19,000 was paid for a one-year fire insurance policy; (2) on june 30 the company advanced its chief financial officer $17,000; principal and interest at 7% on the note are due in one year; and (3) equipment costing $67,000 was purchased at the beginning of the year for cash. depreciation on the equipment is $13,400 per year. if the adjusting entries were not recorded, would net income be higher or lower and by how much?

Net income will be higher for 17,555 if these transactions are not recorded

Explanation:

(1) expired insurance:

we multiply the contract by the expred portion, which is 3 months (Oct Nov and Dec)

19,000 = 1 year = 12 months

acrued: 3 months

19,000 x 3/12 =  4,750 insurance expense

(2) interest revenue on note receivable

principal x rate x time

we must multiply by half a year which is the accrued time between June 30th to December 31th

17,000 x 7% x 6/12 = 595 interest revenue

(3) depreciation 13,400

Total adjustment variation in net income:

interest revenue                   595

insurance expense           (4,750)

depreciation expense     (13,400)

  net income                    (17, 555)

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