The unadjusted trial balance and the adjustment data for Porter Business Institute are given below along with adjusting entry information. What is the impact on net income if these adjustments are not recorded? Show the calculation for net income without the adjustments and net income with the adjustments. Which one gives the most accurate net income? Which accounting principles are being violated if the adjustments are not made? Porter Business Institute Unadjusted Trial Balance December 31 (in millions)?Cash…………………………………………………. ?$58,000??Accounts receivable…………..………………59,000??Prepaid insurance …………………………...12,000??Equipment

Question

…………………………………….8,000??Accumulated depreciation-equipment ……….. ??$ 2,000Buildings……………………………………………..57,500??Accumulated depreciation-buildings…………..??17,500Land………………………………….55,000??Unearned rent…………………………………..??16,000Long-term notes payable……………………….??50,000Common stock……………………….??50,000Retained earnings ……………………………….??65,600Tuition fees earned ……………………….??74,000Training fees earned ………………………….??23,400Wages expense ……………………………………...32,000??Utilities expense …………………………….8,000??Property taxes expense …………………………5,000??Interest expense …………………………………….4,000?________Totals ………………………………………..$ 298,500?$298,500Additional information items:a. The Prepaid Insurance account consists of a payment for a 1 year policy. An analysis of the insurance invoice indicates that one half of the policy has expired by the end of the December 31 year-end.b. A cash payment for space sublet for 8 months was received on July 1 and was credited to Unearned Rent.c. Accrued interest expense on the note payable of $1,000 has been incurred but not paid.

What will be an ideal response?

Answer 1

The accrual basis gives the most accurate net income because it requires all revenues to be recorded when earned and all expenses to be recorded when incurred. This follows the expense recognition (matching) principle which states that expenses of the period should be matched with revenues of the period. There is a net increase of $5,000 in net income. Revenues increase by $12,000 to recognize the rent earned. Expenses increase by $7,000; a $6,000 increase in Insurance Expense and a $1,000 increase in Interest Expense.