a. Prepaid Rent (400) Rent Expense (400) B ALANCE S HEET INCOME S TATEMENT Assets = Liabilities + Stockholders’ Equity+ Revenues – Expenses b. Accumulated Depreciation Depreciation (150) Expense (150) B ALANCE S HEET INCOME S TATEMENT Assets = Liabilities + Stockholders’ Equity+ Revenues – Expenses c. Chemical Chemical Inventory (8,100) Expense (8,100) B ALANCE S HEET INCOME S TATEMENT Assets = Liabilities + Stockholders’ Equity+ Revenues – Expenses d. Wages and Wages and Salaries Salary Payable 1,080 Expense (1,080) B ALANCE S HEET INCOME S TATEMENT Assets = Liabilities + Stockholders’ Equity+ Revenues – Expenses e. Income Taxes Income Tax Payable 1,881 Expense (1,881) Explanations:
CHAPTER 4 INCOME MEASUREMENT AND ACCRUAL ACCOUNTING 4-41 PROBLEM 4-7A (Concluded) (e) Calculation of taxes due: Treatment revenue $ 40,600 Wages and salary expense (23,580) Utility expense (1,240) Advertising expense (860) Rent expense (400) Depreciation expense (150) Chemical expense (8,100 ) Income before tax $ 6,270 Tax rate 0.30 Income tax expense $ 1,881 2. On the basis of the information available, Lewis appears to be a profitable business. Net income for the month was $6,270 – $1,881 (taxes), or $4,389. With treatment revenue of $40,600, this results in a profit margin of $4,389/$40,600, or approxi- mately 11%. A L T E R N A T E M U L T I - C O N C E P T P R O B L E M S LO 2,3,4 PROBLEM 4-8A CASH AND ACCRUAL INCOME STATEMENTS FOR A MANUFACTURER 1. Cash revenue: 50,000 sandwiches $2 $ 100,000 Less: Amounts not yet received 25,000 Cash revenue $ 75,000 Accrual revenue: 50,000 sandwiches $2 $ 100,000 2. Accountants recognize revenue under an accrual accounting system when it is earned. In the catering business, revenue is earned as the sandwiches are delivered to the vendors. Marie’s might consider using the cash method to account for sales of sandwiches if there is a significant amount of uncertainty about the collectibility of accounts receivable.
4-42 FINANCIAL ACCOUNTING SOLUTIONS MANUAL PROBLEM 4-8A (Concluded) 3. Income statement under the accrual basis: MARIE’S CATERING INCOME STATEMENT FOR THE YEAR ENDED XX/XX/XX Sales revenue $100,000 Cost of goods sold 69,600 * Gross profit $ 30,400 Operating expenses: Office salaries $ 12,000 Equipment depreciation 1,000** Truck depreciation 2,800 *** Total operating expenses $ 15,800 Net income $ 14,600 *Rent: $800 12 $ 9,600 Raw materials 25,000 Salaries and wages 35,000 Cost of goods sold $69,600 **$10,000/10 years ***$14,000/5 years
CHAPTER 4 INCOME MEASUREMENT AND ACCRUAL ACCOUNTING 4-43 LO 3,4 PROBLEM 4-9A REVENUE AND EXPENSE RECOGNITION Income statements for the first two years: SUE’S AUDIO BOOK RENTALS INCOME STATEMENTS Year 1 Year 2 Sales revenue (a) $ 21,000 $ 63,000 Expenses: Advertising (b) $ 6,000 $ 4,500 Salaries 0 12,000 Depreciation (c) 2,500 2,500 Rent (d) 9,000 9,000 Total expenses $ 17,500 $ 28,000 Net income $ 3,500 $ 35,000 Explanations:
4-44 FINANCIAL ACCOUNTING SOLUTIONS MANUAL LO 5,6 PROBLEM 4-10A ADJUSTMENTS AND FI- NANCIAL STATEMENTS 1. Adjustments: B ALANCE S HEET INCOME S TATEMENT Assets = Liabilities + Stockholders’ Equity+ Revenues – Expenses a. Prepaid
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