Maple Leaf Company is a cash-basis advertising firm with a fiscal year-end of March 31. Maple Leaf’s employees earn a normal weekly wage of $18,000 during a five-day work week. March 31 falls on a Tuesday for the current year. Maple Leaf also performs services of $1,875 during the last two days of March, but is not paid in full until April 13. As a result of operations, Maple Leaf’s net income for the most recent fiscal year will be by

Net Income will be overstated by $5,325

Explanation:

The entry according to accrual concept on 31 March, must be:

For Wages:

Dr Wages Expense Accrued $7200

Cr                   Wages Payable            $7200

For Additional Services (Sales):

Dr Trade Receivable $1875

Cr                Sales                  $1875

We have recorded neither of the journal entries of the above. So the net effect on the net income is $5325 ($1875 Income - $7200 Expenses). This net effect not recorded will overstate the net income by $5325.