Question

QUESTION 31 Mary Goodman had always wanted to open an advertising firm. Finally, at the beginning of 2019, she decided to leave the firm of Light, Dry and Cool and open her own firm. In 2019, Mary invested her life savings of $300,000 cash in the firm in exchange for 5,000 shares of stock. Several of Mary's close associates lent the firm an additional $100,000 and took a notes payable in exchange. The firm used cash to purchase a small building for $200,000, office equipment of $20,000, and office furniture and fixtures of $50,000. The firm also used cash to purchase computer equipment which cost $10,000. A summary of other transactions for 2019 include: a. Fees earned during the year amounted to $280,000. By the end of the year $160,000 had been collected in cash, and the rest will be collected in 2020. b. Operating expenses of $140,000 were incurred and paid in cash during the year. Interest expense of 5,000 was accrued on the loan the firm received from Mary's associates was not paid Taxes of $3,500 were incurred and remained unpaid at the end of the year. Depreciation expense of $20,000 was recorded for the year. C. d. REQUIRED: a. Prepare an income statement to determine profit or loss.

Answer 1

NOTE: Light, Dry and Cool Income Statement For The Year Ended December 31, 2019 Revenue: Professional fees earned $280,000 Operating Expenses: Operating Expenses $140,000 Depreciation Expense $20,000 Total Operating Expenses $160,000 Operating Profit $120,000 Interest Expense $5,000 Profit Before Income Taxes $115,000 Income Tax Expense $3,500 Profit for the Year $111,500 Under accrual basis accounting, revenue and expense shall be recognized in firm's books based on the occurance of the same, irrespective of time of receipt of cash for sale or payment of cash for expense. That is, a revenue transaction or an expense transaction shall be recorded in books as and when they are generated or occured instead of waiting for cash receipt or payment transaction to take place.