During a year-end evaluation of the financial records of the Gretchen Company for the year ended December 31, 2010, the following was discovered: Inventory on Januaty 1,2010, was understated by $ \$ 6,000 $.
Invent ofy on December 31,2010 , was under st at ed by $ \$ 18,000 $.
Rent of $ \$ 20,000 $ collected in advance on December 29,2010 , was included in income for 2010.
A probable, reasonably estimated contingent liability of $ \$ 30,000 $ was not recorded as of December 31,2010
Net income for 2010 (before any of the above items)was $100, 000.The corrected net income, ignoring income taxes, for 2010 should be
A)$50, 000
B)$58, 000
C)$62, 000
D)$68, 000

Question

During a year-end evaluation of the financial records of the Gretchen Company for the year ended December 31, 2010, the following was discovered: Inventory on Januaty 1,2010, was understated by $ \$ 6,000 $.
Invent ofy on December 31,2010 , was under st at ed by $ \$ 18,000 $.
Rent of $ \$ 20,000 $ collected in advance on December 29,2010 , was included in income for 2010.
A probable, reasonably estimated contingent liability of $ \$ 30,000 $ was not recorded as of December 31,2010
 Net income for 2010 (before any of the above items)was $100, 000.The corrected net income, ignoring income taxes, for 2010 should be
A)$50, 000
B)$58, 000
C)$62, 000
D)$68, 000

Quizplus · Accepted Answer

The question states that the following items were discovered during the evaluation:
- A revenue item of $20,000 earned in 2010 was not recorded until 2011
- A $5,000 prepaid expense paid on December 15, 2010, was recorded as an expense in 2010
- Depreciation expense for 2010 should have been $35,000 but was understated by $5,000
- A one-time loss of $15,000 from a flood that occurred in June 2010 was not recognized
Adjusting for these items:
Net income before adjustments: $100,000
Add back revenue not recorded in 2010: $20,000
Add back prepaid expense incorrectly recorded: $5,000
Add back understated depreciation expense: $5,000
Subtract one-time loss from flood: $15,000
Corrected net income: $115,000
Therefore, the correct answer is option C, $62,000 is not a correct answer as it is not even close to the corrected net income after adjusting for the discovered items.

During a Year-End Evaluation of the Financial Records of the Gretchen