Question

Stella's Bakery calculated their net income to be $100,000 before any adjusting journal entries were recorded. What amount of net income will Stella's Bakery report after adjusting journal entries are recorded for the following transactions:

1. Record depreciation expense of $15,000
2. Earned $25,000 of rent revenue that was initially recorded as unearned revenue
3. Reclassified $10,000 of maintenance expense to a prepaid asset (represents prepaid maintenance coverage for the upcoming year)
4. Estimated bad debt expense of $10,000; there is no beginning allowance balance

Answer 1

Amount of net income will Stella's Bakery report after adjusting journal entries is $ 110,000

Calculation:

Stella`s Bakery
Revised Net Income
Net Income Before Adjustment Entries		$        100,000
Add:
Rent Revenue	$         25,000
Maintenance Expense	$         10,000	$          35,000
Subtract:
Depreciation Expense	$       (15,000)
Bad Debt Expense	$       (10,000)	$        (25,000)
Revised Net Income		$        110,000

Notes:

1) Rent is a revenue. So, It is added.

2) Depreciation and Bad Debts are expenses. So, There are subtracted.

3) Maintenance Expense is reclassified as Prepaid asset. So, in order to decrease such expense it is added back to Net Income.