Question

The following information applies to the questions displayed below.]

North Star prepared the following unadjusted trial balance at the end of its second year of operations ending December 31.

Account Titles	Debit				Credit
Cash	$	12,800
Accounts Receivable		6,800
Prepaid Rent		2,560
Equipment		21,800
Accumulated Depreciation					$	1,080
Accounts Payable						1,080
Income Tax Payable						0
Common Stock						25,600
Retained Earnings						2,900
Sales Revenue						52,400
Salaries and Wages Expense		25,800
Utilities Expense		13,300
Rent Expense		0
Depreciation Expense		0
Income Tax Expense		0
Totals	$	83,060			$	83,060

Other data not yet recorded at December 31:

1. Rent expired during the year, $1,280.
2. Depreciation expense for the year, $1,080.
3. Utilities used and unpaid, $9,800.
4. Income tax expense, $470.

4. Compute the amount of net income using (a) the preliminary (unadjusted) numbers and (b) the final (adjusted) numbers. Had the adjusting entries not been recorded, would net income have been overstated or understated, and by what amount?

Answer 1