Blimp Co. reported net income of P1,000,000 for the year ended December 31, 2020. Upon further...

Blimp Co. reported net income of P1,000,000 for the year ended December 31, 2020. Upon further inspection of its records, the entity failed to recognized prepaid insurance of P12,000; accrued expense and revenue of P2,000 and P4,000, respectively. An advance payment of P10,000 from a customer was also entirely recognized as a liability. It was found out that Blimp has already earned 30% of it. Lastly, sales from a customer amounting to P20,000 was incorrectly recognized as P2,000.

1. Following the concepts of accrual accounting, how much is the correct net income of Blimp in 2020?

2. Why are adjusting entries prepared at the end, and not at the beginning, of a period?

Expert Solution


	ADJUSTING ENTRIES
	Account Titles	Debit	Credit
	Prepaid insurance not recognized:
	Prepaid Insurance	12,000
	Insurance expenses		12,000

	Accrued expenses not recognized
	Expenses	2,000
	Accrued Expenses		2,000

	Revenue not recognized:
	Accounts Receivable	4,000
	Revenue		4,000

	Not Recognized 30% earned Revenue from Advance
	Unearned Revenue	3,000		(10000*30%)
	Revenue		3,000

	Incorrectly recognized Sales
	Accounts Receivable	18,000		(20000-2000)
	Revenue		18,000

	Reported Net Income	1,000,000
	Adjustments:
	Prepaid insurance not recognized:	12,000
	Accrued expenses not recognized	(2,000)
	Revenue not recognized:	4,000
	Not Recognized 30% earned Revenue from Advance	3,000
	Incorrectly recognized Sales	18,000
	CORRECT NET INCOME OF BLIMP IN 2020	1,035,000

2	Since accounts are closed at the end of a period, Adjusting entres are required at end of period to arrive at correct income and balance sheet

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