Bethany Corp. reported $80,000 of net income for 2016. The following errors were then discovered: · Ending 2016 accrued expense was overstated by $2,000.
· 2016 earned revenue was overstated by $3,000.
· Ending 2016 prepaid expense was overstated by $500.
Ignoring income taxes, what is the correct amount of 2016 net income?
A) $85,500
B) $84,500
C) $78,500
D) $76,500

Question

Quizplus · Accepted Answer

The correct net income for 2016, after adjusting for the discovered errors, is calculated as follows: Start with the reported net income of $80,000. Then, adjust for each error:1. Decrease net income by $2,000 because the ending 2016 accrued expense was overstated. This means expenses were recorded as too high, and correcting this will increase net income.2. Decrease net income by $3,000 because 2016 earned revenue was overstated. This means revenue was recorded as too high, and correcting this will decrease net income.3. Increase net income by $500 because the ending 2016 prepaid expense was overstated. This means expenses were recorded as too high, and correcting this will increase net income.Therefore, the adjusted net income is $80,000 - $2,000 - $3,000 + $500 = $75,500. However, since this option is not available, it appears there was a mistake in my calculation. Let's correct the approach:1. Ending 2016 accrued expense overstated by $2,000: Correcting this error would decrease expenses, thus increasing net income by $2,000.2. 2016 earned revenue overstated by $3,000: Correcting this error would decrease revenue, thus decreasing net income by $3,000.3. Ending 2016 prepaid expense overstated by $500: Correcting this error would decrease expenses (since prepaid expenses are an asset, and overstating it means expenses were understated), thus increasing net income by $500.Correct calculation: $80,000 - $2,000 (overstated expenses corrected) + $2,000 - $3,000 (overstated revenue corrected) + $500 = $80,000 - $500 = $79,500. It seems there's another miscalculation in my explanation. The correct approach to find the adjusted net income should directly address the impact of each error on the initially reported net income without double adjustments. Given the errors:- Overstated accrued expense would mean that actual expenses were less, so correcting it would increase net income.- Overstated earned revenue means actual revenue was less, so correcting it would decrease net income.- Overstated prepaid expense means that actual expenses were more, so correcting it would decrease net income.The correct adjustments should be: Start with the reported net income of $80,000, subtract the overstatement in earned revenue ($3,000), and add back the overstatements in accrued expense ($2,000) and prepaid expense ($500) incorrectly deducted from the net income calculation. The correct calculation should reflect the net effect of these adjustments on the initially reported net income. Given the errors in my previous explanations, let's focus on the correct interpretation of the impact of each error on net income:1. Correcting an overstated accrued expense by $2,000 actually means that expenses were initially recorded too high. Correcting this would increase net income by $2,000.2. Correcting overstated earned revenue by $3,000 means revenue was initially recorded too high. Correcting this would decrease net income by $3,000.3. Correcting an overstated prepaid expense by $500 means that expenses were initially recorded too low (since overstating prepaid expenses reduces expense recognition). Correcting this would decrease net income by $500.Therefore, the correct adjustment to net income should be: $80,000 - $3,000 (correction for overstated revenue) + $2,000 (correction for overstated accrued expense) - $500 (correction for overstated prepaid expense) = $78,500. This reflects the accurate calculation based on the described adjustments.