Chapter 2, Problem 2.17E

Accrual accounting income determination

• LO2–4, LO2–8

During the course of your examination of the financial statements of the Hales Corporation for the year ended December 31, 2018, you discover the following:

a. An insurance policy covering three years was purchased on January 1, 2018, for $6,000. The entire amount was debited to insurance expense and no adjusting entry was recorded for this item.

b. During 2018, the company received a $1,000 cash advance from a customer for merchandise to be manufactured and shipped in 2019. The $1,000 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 $750 were on hand at December 31.

d. Hales borrowed $20,000 from a local bank on October 1, 2018. Principal and interest at 12% will be paid on September 30, 2019. No accrual was recorded for interest.

e. Net income reported in the 2018 income statement is $30,000 before reflecting any of the above items.

Required:

Determine the proper amount of net income for 2018.