Emily Schnarr
Honors Component
Accounting 303
Chapter 3

Accounting, Analysis, and Principles

Accounting:

1) Depreciation Expense $9,500
Accumulated Depreciation 9,500 2) Interest Expense 8,250
Interest Payable 8,250 3) Unearned Service Revenue 10,000
Service Revenue 10,000 4) Advertising Expense 2,500
Prepaid Advertising 2,500 5) Salaries and Wages Expense 3,500
Salaries and Wages Payable 3,500

Analysis:

Revenues Ticket Revenues $360,000 Expenses Salaries and Wages 67,600 Advertising 18,680 Interest 1,400 87,680 Net Income before Adjustments $272,320

Revenues Ticket Revenues $360,000 Expenses Salaries and Wages 71,100 Advertising 21,180 Interest 9,650 101,930 Net Income after Adjustments $258,070

Amato’s bankers should wait for Amato to adjust their accounts before deciding on the loan renewal for a couple of reasons. If Amato were to show the bankers their pre-adjusted revenues, expenses, and net income, the expenses would be understated by about $14,250, making their net income seem higher than it actually should be.

If Amato adjusted their accounts and properly showed all revenues and expenses, their net income would be accurately reported. The bank could then make a better and more feasible decision on whether or not to renew the loan and how much the loan should be. If they had not waited for the adjusted net income, they could have decided to go ahead with the loan renewal since they saw such low expenses and high enough net income to be able to handle a bigger loan. This could have caused issues when it came to Amato actually having the money to repay the loan and not default.

Principle:

Although Amato's bankers are willing to wait for the adjustment process to be completed before they receive financial information, they