Question

Neighborhood Realty, Incorporated, has been operating for three years and is owned by three investors. S. Bhojraj owns 60 percent of the total outstanding stock of 9,020 shares and is the managing executive in charge. On December 31, current year, the following financial items for the entire year were determined: commissions earned and collected in cash, $151,200, plus $16,600 uncollected; rental service fees earned and collected, $21,700; salaries expense paid, $62,340; commissions expense paid, $35,280; payroll taxes paid, $1,500; rent paid for January through November, $2,475 (not including December rent yet to be paid); utilities expense paid $1,800; promotion and advertising paid, $7,620; income taxes paid, $22,600; and miscellaneous expenses paid, $400. There were no other unpaid expenses at December 31. Also during the year, the company paid the owners "out-of-profit" cash dividends amounting to $11,500. Complete the following income statement: NEIGHBORHOOD REALTY, INCORPORATED Income Statement Revenues: Commissions earned Rental service fees Total revenues Expenses: Salaries expense Commission expense Payroll tax expense Rent expense Utilities expense Promotion and advertising expense Miscellaneous expenses Total expenses (excluding income taxes) Pretax income Income tax expense Net income $ 55,260

Answer 1

Answer:

Neighborhood Realty, Incorporated Income Statement For the year ended December 31, 20XX Revenues: Commission earned $ 167,800 Rental service fees $ 21,700 Total Revenues $ 189,500 Expenses: Salaries expense $ 62,340 Commission expense $ 35,280 Payroll tax expense $ 1,500 Rent expense $ 2,700 Utilities expense $ 1,800 Promotion and advertising expense $ 7,620 Miscelleaneous expense $ 400 Total expenses (excluding income taxes) $ 111,640 Pretax income $ 77,860 ($189,500 - $111,640) Income tax expense $ 22,600 Net Income $ 55,260 ($77,860 - $22,600)

Workings:

Commission earned but not collected amounting to $16,600 need to be considered in the commission earned. Because of the accrual concept, which means that we have to recognize income in the period when it is earned irrespective of whether it is received or not. Accrual concept mentions that we have to consider expenses in the period to which they are incurred irrespective of whether they are paid or not. Hence, we have to consider rent expense for december. Rent expense for december = ($2,475/11 months) Rent expense for december = $225 Total rent expense = $2,475 + $225 Total rent expense = $2,700