On December 31, 2024, Oakcrest Company prepared an income statement and a balance sheet. In preparing the adjusting entries at year-end, Oakcrest failed to record the adjusting entry for service revenue earned but not yet collected or billed amounting to $17,000. The income statement reported net income of $118,000. The balance sheet reported total assets of $529,000, total liabilities of $347,000, and stockholders' equity of $182,000. What is the correct amount for Oakcrest to report for each of these elements?

Question

BlackTom AI · Accepted Answer

Accrued (earned but unrecorded) service revenue increases assets (Accounts Receivable) and increases revenue, which flows to net income and retained earnings (stockholders’ equity).

1. Relevant concepts
- Accrued revenue: record when earned even if not billed/collected.
- Adjusting entry: Dr Accounts Receivable, Cr Service Revenue.
- Effects: Assets ↑, Revenues ↑ → Net income ↑ → Retained earnings (equity) ↑. Liabilities are unaffected.

2. Step-by-step reasoning and journal entry
- Adjusting journal entry to record the omitted revenue:
  Dr Accounts Receivable 17,000
  Cr Service Revenue 17,000
- This entry increases assets by $17,000 and increases revenue by $17,000, which increases net income and thereby increases stockholders’ equity by $17,000.

3. Arithmetic with intermediate steps
- Reported net income: 118,000
  Net income after adjustment = 118,000 + 17,000 = 135,000
- Reported total assets: 529,000
  Total assets after adjustment = 529,000 + 17,000 = 546,000
- Total liabilities are unchanged = 347,000
- Reported stockholders’ equity: 182,000
  Stockholders’ equity after adjustment = 182,000 + 17,000 = 199,000

4. Why this is correct
Recording accrued revenue recognizes income that was earned but omitted; this raises revenue (and net income) and records a receivable (asset). Because retained earnings accumulate net income, equity increases by the same amount. Liabilities are not impacted by earned receivables.

5. Why the other options are incorrect (brief)
- Option A and B: show decreases in net income or increases in liabilities, which would result from recording an expense or a liability, not accrued revenue. They also change liabilities (to 364,000) whereas this transaction does not affect liabilities.
- Option D: reduces assets and equity, implying an omission of an expense or overstatement rather than unrecorded revenue—contrary to the facts.

6. Conclusion
The correct amounts are: Net income $135,000; Total assets $546,000; Total liabilities $347,000; Stockholders’ equity $199,000 — matching the provided answer.

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