Question

Koda Inc. sells dog toys and has the following events happen in March. In the blanks write how much MARCH'S net income increases or decreases by for the transaction(s). If it increases put a + followed by the amount. If it decreases put a - followed by the amount. If there is no impact put +0. For example, if net income goes up by $100 then put +100. No dollar signs!

1. Koda had $50,000 of cash sales and $30,000 of sales on account with terms 2/10 net 30 during March. Koda also collected $10,000 of cash related to February's sales made on account.

2. Of the new sales on account in March, 90% were paid within 3 days of the sales made.

3. Koda uses the percent of credit sales to calculate bad debt and estimates bad debt at 4%. Total sales for March were the $50,000 cash sales and $30,000 sales on account. The beginning balance in the allowance account was $700.

4. Koda received $8,000 in cash from customers for dog training classes that the company will host in April.

5. At the end of March, Koda's employees had not been paid yet for work they performed the last two weeks of March. The total amount not paid yet was $5,000. Koda withholds 20% for income tax for employees and also withholds 6% for social security for the employee and 6% for the employer.

6. Koda decided to sell an old computer it had for $400. The original cost of the computer was $2,000 and the accumulated depreciation balance was $1,300.

Answer 1

Given below is the point-wise explanation of increase/decrease/no change for the net income of Koda Inc. during March:

1. Koda had $50,000 of cash sales and $30,000 of sales on account with terms 2/10 net 30 during March. Koda also collected $10,000 of cash related to February's sales made on account.

Net income in March will change only because of the new sales made during the month and accounted for as a revenue item. Mere collection from Accounts receivables for the sales made in earlier months will have no effect on the net income.

Hence, the net income will increase by (50000+30000) = $80,000 in March due to the above transaction.

Ans: +80,000

2. Of the new sales on account in March, 90% were paid within 3 days of the sales made.

As said earlier, mere collection from Accounts receivables for the sales made earlier will have no effect on the net income. However, the discount given to the customer will be treated as an expense and will reduce net income.

Discount allowed = 2/10 net 30, or 2% if paid within 10 days.

= 2% of (90% of $30,000) = $540

Hence, net income will decrease by $540

Ans: -540

3. Koda uses the percent of credit sales to calculate bad debt and estimates bad debt at 4%. Total sales for March were the $50,000 cash sales and $30,000 sales on account. The beginning balance in the allowance account was $700.

Creation of allowance for bad debts will result in a fall in the net income, as Expense account will be debited and a liability account will be credited in the books of accounts.

So, amount of allowance made during March = 30000*4% = $1,200

Hence, net income will decrease by $1,200

Ans: -1200

4. Koda received $8,000 in cash from customers for dog training classes that the company will host in April.

The above transaction is in the nature of receiving unearned income. Receiving unearned income will not have any effect on the net income as Unearned Income is treated as a liability till the service is provided which is due in April.

So, there will be no effect on Net income.

Ans: +0

5. At the end of March, Koda's employees had not been paid yet for work they performed the last two weeks of March. The total amount not paid yet was $5,000. Koda withholds 20% for income tax for employees and also withholds 6% for social security for the employee and 6% for the employer.

The journal entry for the above would be:

Salaries expense A/c Dr. $5,000

Company's contribution towards Social Security A/c Dr. $300 (5000*6%)

Withholding taxes for employees A/c Cr. $1,000 (5000*20%)

Withholding employee's contribution towards Social Security A/c Cr. $300

Salary payable A/c Cr. $4,000 (Balancing figure)

We can see that the first two lines of the journal are in the nature of expenses which will decrease the net income. Other accounts used are in the nature of liabilities.

Hence, net income will decrease by (5000+300) = $5,300

Ans: -5300

6. Koda decided to sell an old computer it had for $400. The original cost of the computer was $2,000 and the accumulated depreciation balance was $1,300.

Receiving an amount for selling an asset will not directly have an effect on the net income. If there's a profit/loss on the sale, then only that will have an effect on the net income.

The journal entry for the above transaction would be:

Cash A/c Dr. $400

Accumulated Depreciation A/c Dr. $1,300

Loss on Sale of Asset A/c Dr. $300

Computer A/c Cr. $2,000

Hence, the net income will decrease by $300 which is the loss on sale of asset.

Ans: -300