During the course of your examination of the financial statements of the Hales Corporation for the year ended December 31, 2021, you discover the following:

a. An insurance policy covering three years was purchased on January 1, 2021, for $3,600. The entire amount was debited to insurance expense and no adjusting entry was recorded for this item.
b. During 2021, the company received a $625 cash advance from a customer for merchandise to be manufactured and shipped in 2022. The $625 was credited to sales revenue. No entry was recorded for the cost of merchandise.
c. There were no supplies listed in the balance sheet under assets. However, you discover that supplies costing $575 were on hand at December 31.
d. Hales borrowed $15,000 from a local bank on October 1, 2021. Principal and interest at 12% will be paid on September 30, 2022. No accrual was recorded for interest.
e. Net income reported in the 2021 income statement is $31,000 before reflecting any of the above items.

Required: Determine the proper amount of net income for 2021. (Amounts to be deducted should be indicated by a minus sign.)

The adjusted net income for the year is computed below:

Net income before adjustments                                   $ 31,000

a. Less: Insurance expense recorded                        - $   1,200

b. Less; Revenue incorrectly recorded                      - $     625    

c. Supplies on hand  reversed from expenses         + $     575

d. Interest expense on loan                                       -  $    450  

Adjusted net income                                                     $ 29,300

Explanation:

Computation of adjusted net income

Net income before adjustments                                   $ 31,000

Insurance expense for the year

$ 3,600( prepaid insurance) /3 years * 1 year              $ ( 1.200)

Revenue recorded for goods not shipped to be

reversed.                                                                         $ (   625)

Supplies on hand reduced from expenses                  $     575

Interest expense on $ 15,000 loan @ 12 % for 3

months - October 01 - December 31.

$ 15,000 *12 % * 3/12                                                      $ (  450)

Adjusted net income                                                     $ 29,300      

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