Explanation:
Presented below are the adjusting entries:
a. Debit Insurance expense A/c $210
To Prepaid insurance A/c $210
(Documenting the insurance expense recognition)
The calculation is detailed below:
= $840 × 6 months ÷ 24 months
= $210
b. Debit Supplies expense A/c $600
To Supplies A/c $600
(Adjusting the supplies account)
The supplies expense is calculated as follows
= Unadjusted supplies balance - supplies available
= $1,000 - $400
= $600
c. Debit Repairs and Maintenance expense A/c $900
To Accrued Liabilities A/c $900
(Recording the repairs and maintenance expenses)
d. Debit Accounts Receivable A/c $8,450
To Service revenue A/c $8,450
(Recording the completion of the contract)
e. Debit Depreciation expense A/c $3,250
To Accumulated depreciation A/c $3,250
(Noting the depreciation expense)
f. Debit Interest expense A/c $600
To Interest payable A/c $600
(Documenting the interest expense recognition)
g. Debit Income tax expense A/c $8,000
To Income tax payable A/c $8,000
(Recording the income tax expense)
The calculation is provided below:
= $40,000 × 20%
= $8,000
2. The potential misstatement in net income is now assessed
= Expenses - revenues
where,
Expenses = $210 + $600 + $900 + $3,250 + $600 + $8,000
=$13,560
And, revenues equal $8,450
Hence, the overstated net income is
= $13,560 - $8,450
= $5,110
