Question

The income statement shown below was sent by Samuel Cox, owner of Cox Video Center, to several of his creditors who had asked for financial statements. The business is a sole proprietorship that sells audio and other electronic equipment. One of the creditors looked over the income statement and reported that it did not conform to generally accepted accounting principles.

  

Cox Video Center Income Statement December 31, 2016
Cash Collected from Customers				$	688,000
Cost of Goods Sold
Merchandise Inventory, Jan. 1	$	77,500
Payments to Suppliers		440,500
		518,000
Less Merchandise Inventory, Dec. 31		87,500
Cost of Goods Sold					430,500
Gross Profit on Sales					257,500
Operating Expenses
Salaries of Employees	$	80,400
Salary of Owner		31,800
Office Expense		30,900
Depreciation Expense		20,600
Income Tax of Owner		7,900
Payroll Taxes Expense		8,900
Advertising and Other Selling Expenses		22,800
Repairs Expense		11,900
Insurance Expense		4,300
Interest Expense		11,900
Utility and Telephone Expense		18,400
Legal and Audit Expense		3,400
Miscellaneous Expense		28,400
Total Expenses					281,600
Net Loss from Operations					(24,100	)
Increase in Appraised Value of Land during Year					27,000
Net Income				$	2,900

  

The following additional information was made available by Cox.
a.	On January 1, 2016, accounts receivable from customers totaled $26,600. On December 31, 2016, the receivables totaled $32,900.
b.	No effort has been made to charge off worthless accounts. An analysis shows that $1,850 of the accounts receivable on December 31, 2016, will never be collected.
c.	The beginning and ending merchandise inventories were valued at their estimated selling price. The cost of the ending inventory is determined to be $48,400, and the cost of the beginning inventory is determined at $44,700.
d.	On January 1, 2016, suppliers of merchandise were owed $39,100, while on December 31, 2016, these debts were $45,325.
e.	The owner paid himself a salary of $2,650 per month from the funds of the business and charged this amount to an account called Salary of Owner.
f.	The owner also withdrew cash from the firm’s bank account to pay himself $4,950 interest on his capital investment. This amount was charged to Interest Expense.
g.	A check for $7,900 to cover the owner’s personal income tax for the previous year was issued from the firm’s bank account. This was charged to Income Tax of Owner.
h.	Depreciation on assets was computed at 8 percent of the gross profit. An analysis of assets showed that the original cost of the equipment and fixtures was $64,200. Their estimated useful life is 12 years with no salvage value. The building cost $150,250. Its useful life is expected to be 25 years with no salvage value.
i.	Included in Repairs Expense was $6,650 paid on December 22 for a new parking lot completed that day.
j.	The increase in land value was based on an appraisal by a qualified real estate appraiser.

  

Prepare an income statement in accordance with generally accepted accounting principles.

Answer 1

Cox Video Center
Income Statement
December 31, 2016

Depreciation Expense(64200/12+150250/25)

particulars	details	Amt.
sales(688000+32900-26600)		694300
Less: Cost of good sold		442525
Gross profit		251775
selling expenses
Advertising and Other Selling Expenses	22800
total	22800
Administrative expenses
Depreciation Expense(64200/12+150250/25)	11360
Salaries of Employees $	80400
Office Expense	30900
Payroll Taxes Expense	8900
Repairs Expense(11900-6650)	5250
Insurance Expense	4300
Interest Expense	11,900
Utility and Telephone Expense	18400
Legal and Audit Expense	3400
Miscellaneous Expense	28400
baddebts	1850
total	205060
net profit	23975

1. Salary of Owner will be charges to profit and loss appropriation account.

2.Income Tax of Owner will be drawings of the owner

3. $6650 as repair expenses for parking lot is an capital expenditure hence deducted from total repair expenses.

4.Upward revaluation is not considered a normal gain and is not recorded in income statement rather it is directly credited to an equity account called revaluation surplus.