Fortune Inc. prepared the following unadjusted trial balance at the end of its third year of operations ending December 31. Account Titles Debit Credit Cash $12,000 Accounts Receivables 6,000 Prepaid Rent 2,400 Equipment 21,000 Accumulated Depreciation $1,000 Accounts Payable 1,000 Income tax payable 0 Common stock 24,800 Retained earnings 2,100 Sales revenue 50,000 Salaries and Wages 25,000 Utilities 12,500 Rent 0 Depreciation expense 0 Income tax expense 0 Total $78,900 $78,900 Other data not yet recorded at December 31: a. Rent expired during the year, $1,200 b. Depreciation expense for the year, $1,000 c. Utilities used and upaid, $9,000 d. Income tax expense, $390
Compute the amount of Net Income using: a. the preliminary (unadjusted) numbers and b. the final (adjusted) numbers.
In this article, we will delve into the financial statements of Fortune Inc., a company that recently completed its third year of operations. Our focus will be on calculating the net income using both preliminary (unadjusted) numbers and final (adjusted) numbers. By analyzing the adjustments made to the trial balance, we can gain a better understanding of the company’s true financial performance.
To start, let’s calculate the preliminary net income using the unadjusted trial balance. The trial balance provides us with a snapshot of the company’s accounts at the end of the year. We observe that Fortune Inc. reported total revenue of $50,000, which comprises sales revenue. Additionally, total expenses amount to $37,500, with salaries and wages accounting for $25,000 and utilities for $12,500. By subtracting the total expenses from the total revenue, we find:
Preliminary Net Income = Total Revenue – Total Expenses
= $50,000 – ($25,000 + $12,500)
= $50,000 – $37,500
= $12,500
This preliminary net income serves as an initial estimate but does not consider various adjustments necessary for accurate financial reporting.
Now, let’s consider the adjustments that need to be made to obtain the final (adjusted) net income. The unadjusted trial balance does not incorporate certain transactions and expenses that occurred during the year. Let’s examine each adjustment in turn:
Rent Expired: The rent expense for the year is $1,200, which needs to be recognized as an expense. This adjustment reduces the net income by $1,200.
Depreciation Expense: The equipment’s accumulated depreciation is reported at $1,000, but we are provided with the depreciation expense for the year, which is $1,000. By recognizing this expense, the net income is further reduced by $1,000.
Utilities Unpaid: The company has incurred $9,000 in unpaid utilities. To accurately reflect the financial position, this expense needs to be recognized, decreasing the net income by $9,000.
Income Tax Expense: Lastly, the unadjusted trial balance does not account for income tax expense, which amounts to $390. By including this expense, the net income is reduced by $390.
To compute the adjusted net income, we deduct the adjustments made above from the preliminary net income
Adjusted Net Income = Preliminary Net Income – Adjustments
= $12,500 – ($1,200 + $1,000 + $9,000 + $390)
= $12,500 – $11,590
= $910
In conclusion, calculating the net income for Fortune Inc. involves both preliminary (unadjusted) and final (adjusted) numbers. The preliminary net income is determined by subtracting total expenses from total revenue. However, to present an accurate financial picture, adjustments for rent expired, depreciation expense, unpaid utilities, and income tax expense must be considered. After incorporating these adjustments, the adjusted net income for Fortune Inc. is determined to be $910.
By accurately calculating the net income, Fortune Inc. can present a comprehensive financial statement that provides stakeholders with a clearer understanding of the company’s financial performance and profitability.
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