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For the year ending June 30, Island Clinical Services mistakenly omitted adjusting entries for (1) $1,500 of supplies that were used, (2) unearned revenue of $4,200 that was earned, and (3) insurance of $5,000 that expired. What is the combined effect of these errors on (a) revenues, (b) expenses, and (c) net income for the year ending June 30? Enter all amounts as positive values.

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Answer:

The answers are:

A) Revenue was understated by $4,200

B) Expenses were understated by $6,500

C) Net income was overstated by $2,300

Explanation:

  • $4,200 of earned revenue should be recorded as revenue
  • $1,500 of used supplies should be recorded as expenses
  • $5,000 of expired insurance should be recorded as expense

Net income = revenue - expenses

Net income = $4,200 - ($1,500 + $5,000) = -$2,300

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