Question

XYZ Company began operations in May, 2022 by selling common stock to owners in exchange for $90,000 cash. During 2022, ABC Company entered into the following transactions: 1. On May 23, ABC Company purchased inventory for $50,000 cash. 2. On June 1, ABC Company purchased a three-year insurance policy for $32,400 cash. 3. On July 1, ABC Company received $49,000 cash from a customer for services to be performed over the next 8 months. 4. On August 1, ABC Company purchased equipment costing $60,000 by paying $20,000 in cash and agreeing to pay the remainder within six months. The equipment was given a 10-year life and a $4,200 residual value. 5. On August 18, ABC Company sold one-half of the inventory that was purchased on May 23 to a customer for $44,000 cash. Calculate the amount of net income that ABC Company would report in its 2022 income statement after all the above transactions are recorded and all necessary adjusting entries are made and posted.

Answer 1

Journal Entries for the transaction
1-May	Common stock		90,000
	Cash	90,000
23-May	Inventory	50,000
	Cash		50,000
1-Jun	Prepaid Insurance	32,400
	cash		32,400
1-Jul	Cash	49,000
	Service Revenue		49,000
1-Aug	Equipment	60,000
	Cash		20,000
	Accounts payable		40,000
18-Aug	cash	44,000
	Revenue		44,000

XYZ company
Year Ending 2022-Income statement
Revenue:
	Service Revenue	49,000
	Revenue	44,000
Expenses:
	Insurance Expense		6300
	Cost of Goods sold		25,000
	Depreciation on Equipment		2325
Net income			59,375

Net Income Is 59,375

Note: Bold items are calculated below rest is from the Journal Entry

Insurance Expenses:

Given

Insurance for three years 32,400

Was purchased on June 1 2022

Accumulated insurance Expenses

(Total Insurance for 3 years/36 )*total Number of months applied

= (32,400/36)7 =6300

Cost of goods sold:

Inventory 50,000

One half of the inventory was sold that is 25,000

So cos of goods sold would be 25,000

Depreciation on Equipment

Given

Total Equipment cost 60,000

Total Life in months       120

Residual Value               4200

We should Calculate depreciation for 5 months

=((Total equipment Cost -Residual Value)/120)*5

=((60,000-4200)/120)*5

=2325