Question

Carla Vista Co. was organized on April 1, 2016, by Trudy Crawford. Trudy is a good manager but a poor accountant. From the trial balance prepared by a part-time bookkeeper, Trudy prepared the following income statement for the quarter that ended March 31, 2017.

Carla Vista Co. Income Statement For the Quarter Ended March 31, 2017
Revenues
	Rent revenue				$83,000
Operating expenses
	Advertising expense		$4,200
	Salaries and wages expense		26,500
	Utilities expense		1,300
	Depreciation expense		840
	Maintenance and repairs expense		2,800
	Total operating expenses				35,640
Net income					$47,360

Trudy knew that something was wrong with the statement because net income had never exceeded $22,000 in any one quarter. Knowing that you are an experienced accountant, she asks you to review the income statement and other data.

You first look at the trial balance. In addition to the account balances reported in the income statement, the ledger contains these selected balances at March 31, 2017.

Supplies		$4,500
Prepaid Insurance		7,000
Notes Payable		22,500

You then make inquiries and discover the following.

1.		Rent revenue includes advanced rentals for summer-month occupancy, $20,500.
2.		There were $540 of supplies on hand at March 31.
3.		Prepaid insurance resulted from the payment of a 1-year policy on January 1, 2017.
4.		The mail on April 1, 2017, brought the following bills: advertising for week of March 24, $100; repairs made March 10, $1,090; and utilities $300.
5.		Wage expense totals $260 per day. At March 31, 3 days’ wages have been incurred but not paid.
6.		The note payable is a 3-month, 6% note dated January 1, 2017.

Prepare a correct income statement for the quarter ended March 31, 2017.

Answer 1

Carla Vista Co
Income Statement
For the Quarter ended March 31, 2017
Revenues
Rent revenue		$62,500
Operating expenses
Advertising expense	$4,300
Salaries and Wages expense	$27,280
Utilities expense	$1,600
Depreciation Expense	$840
Maintenance and repairs expense	$3,890
Insurance expense	$1,750
Supplies expense	$3,960
Interest on note payable	$337.5
Total operating expenses		$43,957.5
Net Income		$18,542.5
Therefore, the current net income of the company is $18,543
The adjusting entries were not reflected in the income statement and therefore we would give effect to each of the adjusted entry
1. The rental advance received are not shown as part of revenue until the rent service has been rendered and they would be shown as liability in the balance sheet.
Therefore, the rent revenue of the company would reduce to (83000-20500) = $62,500
2. The ledger shows supplies of $4,500 and further enquiry shows balance of $540 for supplies and therefore the difference of $3,960 ($4,500-$540) would be reported as supplies expense
3. Company has paid insurance for one year and is shown as prepaid insurance but for the current quarter company will have to recognize the insurance expense for 3 months.
Company would recognize insurance expense of (7000/12)*3			1750
4. The advertising, repairs and utilities expense would increase to the extent of these bills of $100, $1090 and $300 respectively
5. The wage expense of the company would increase by 260*3 = $780
6. Company will have to provide interest on note payable for 3 months
Interest on notes payable = $22,500*6%*(3/12)