Question

a. Borrowed $870,000 from the bank on December 1, signing a note payable, due in six months.   b. Purchased a new snowplow for $27,000 cash on December 31.   c. Purchased ski supplies for $18,200 on account.   d. Incurred $29,100 in routine maintenance expenses for the chairlifts; paid cash.   e. Received $73,750 for season passes (beginning in the new year).   f. Daily lift passes were sold this month for a total of $82,200 cash.   g. Received a $675 deposit on a townhouse to be rented for five days in January.   h. Paid half the charges incurred on account in (c).   i. Paid $23,600 in wages to employees for the month of December.

2.	Calculate the company’s preliminary net income.

Answer 1

Formula of net income is as follow;

(Net income = Revenues – Expense)

Company’s preliminary net income will be calculated as follow;

Receipts from sale of daily lift passes	$82200
Total revenues		$82200
Less; Expenses;
Purchased of ski supplies	$18200
Routine maintenance expenses	$29100
Wages	$23600
Total expenses		($70900)
Preliminary net income		$11300

Working Note;

1. Purchase of new snowplow is a capital nature expenditure hence it will not be considered for calculating net income.

2. Income from sale of seasonal passes is for future period hence it is an unearned revenue.

3. Receipts of a $675 deposit on a townhouse is for future time so will not be considered.

4. Half payment of supplies purchased will not affect net income because we have already included whole expenses.

5. All other items which are either capital nature or for future period will not be included for calculating net income because as per accrual concept of accounting we will consider items of revenues and expenses for the relevant period only. Hence flow of cash will not make any impact on the net income for the period.