Question

Lowell Corporation has used the accrual basis of accounting for several years. A review of the records, however, indicates that some expenses and revenues have been handled on a cash basis because of errors made by an inexperienced bookkeeper. Income statements prepared by the bookkeeper reported \(29,000 net income for 2016 and \)37,000 net income for 2017. Further examination of the records reveals that the following items were handled improperly.

1. Rent was received from a tenant in December 2016. The amount, \(1,000, was recorded as revenue at that time even though the rental pertained to 2017.

2. Salaries and wages payable on December 31 have been consistently omitted from the records of that date and have been entered as expenses when paid in the following year. The amounts of the accruals recorded in this manner were:

December 31, 2015 \)1,100

December 31, 2016 1,200

December 31, 2017 940

3. Invoices for supplies purchased have been charged to expense accounts when received. Inventories of supplies on hand at the end of each year have been ignored, and no entry has been made for them.

December 31, 2015 $1,300

December 31, 2016 940

December 31, 2017 1,420

Instructions

Prepare a schedule that will show the corrected net income for the years 2016 and 2017. All items listed should be labeled clearly. (Ignore income tax considerations.)

Short answer

The net income is revenues minus expenses, and the correct net income for 2016 is $27,540 and for 2017 is $38,740.

Step-by-step solution

Definition of Net Income

The net income is the income computed by deducting all direct and indirect expenses incurred during the year from revenues generated during the year.

Schedule showing corrected net incomes

	2016 ($)	2017 ($)
Net Income as reported	29,000	37,000
Rent received in 2016, earned in 2017	-1,000	1,000
Salaries and wages not accrued, 12/31/15	1,100
Salaries and wages not accrued, 12/31/16	-1,200	1,200
Salaries and wages not accrued, 12/31/17		-940
Inventory of supplies, 12/31/15	-1,300
Inventory of supplies, 12/31/16	940	-940
Inventory of supplies, 12/31/17		1,420
Corrected Net Income	27,540	38,740