A company has a fiscal year-end of December 31:. (1) on October 1, $18,000 was paid for a one-year fire insurance policy; (2) on June 30 the company advanced its chief financial officer $16,000; principal and interest at 6% on the note are due in one year; and (3) equipment costing $66,000 was purchased at the beginning of the year for cash. Depreciation on the equipment is $13,200 per year. If the adjusting entries were not recorded, would net income be higher or lower and by how much?

Net income would be higher by  $17,220  if the adjusting entries were left unrecorded

Explanation:

The adjusting entries for insurance  prepaid would be to recognize three months of insurance cost as insurance expense i.e $18,000*3/12=$4,500

The adjusting entries for the advance of $16,000 is to recognize interest revenue for six months (from July to December) in the books i.e$16,000*6%*6/12=$480

The depreciation charge would increase expenses by $13,200

The impact of profit is shown below:

insurance expense         ($4,500)

interest revenue                $480

depreciation                   ( $13,200)

total impact                     (17220)

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