The following pre-closing accounts and balances were drawn from the records of Carolina Company on December 31, Year 1: What is the amount of net income that will be reported on the Year 1 income statement?
A)$2,200
B)$3,200
C)$1,000
D)$200

Question

The following pre-closing accounts and balances were drawn from the records of Carolina Company on December 31, Year 1:  What is the amount of net income that will be reported on the Year 1 income statement?
A)$2,200 
B)$3,200 
C)$1,000 
D)$200

Quizplus · Accepted Answer

To calculate the net income, we need to subtract the total expenses from the total revenue. Total Revenue = $12,000 + $16,000 = $28,000 Total Expenses = $14,000 + $11,000 + $2,000 + $10,000 + $1,000 = $38,000 Therefore, Net Income = Total Revenue - Total Expenses = $28,000 - $38,000 = -$10,000. However, since the question specifically asks for the amount of net income that will be reported on the income statement, we need to make an adjustment for the prepaid insurance. Prepaid Insurance is an asset account, but since we are at the end of the year, a portion of it has now expired and should be recorded as an expense. The adjustment is calculated as follows: Prepaid Insurance at end of Year 1 = $3,000 - $1,000 = $2,000 Insurance expense for Year 1 = $2,000 / 2 = $1,000 (since it was a 6-month policy) Therefore, the adjusted Net Income = -$10,000 + $1,000 = -$9,000. However, since net losses are not reported on the income statement, we need to report a zero net income. Therefore, the amount of net income that will be reported on the Year 1 income statement is $0.

The Following Pre-Closing Accounts and Balances Were Drawn from the Records