Question

1. Revenue and Expense Recognition

   Two years ago, Darlene Darby opened a delivery service. Darby reports the following accounts on her income statement:

   Sales	$69,150
   Advertising Expense	3,420
   Salaries Expense	38,480
   Rent Expense	9,440

   These amounts represent two years of revenue and expenses. Darby asks you how she can tell how much of the income is from the first year of business and how much is from the second year. She provides the following additional data:

   1. Sales in the second year are double those of the first year.
   2. Advertising expense is for a $530 opening promotion and weekly ads in the newspaper.
   3. Salaries represent one employee for the first nine months and two employees for the remainder of the time. Each is paid the same salary. No raises have been granted.
   4. Rent has not changed since the business opened.

   Required:

   Prepare income statements for Years 1 and 2. Need solution to c.

Answer 1

income statement :

	year 1	year 2
sales	23,050	46,100
less:expenses
advertising expenses	(1,975)	(1,445)
salaries expense	(14,800)	(23,680)
rent expense (9440/2)	(4,720)	(4,720)
net income	1,555	16,255

working:

sales:

let x be year 1 sales , so year 2 sales are double of year 1 sales =>2x will be year 2 sales.

x+2x = 69,150

=>x= 23,050.

year 1 sale =23,050

year 2 sale = 46,100

advertising expense:

opening promotion expense will be charged in year 1

=>530.

advertising expense remaining = 3420-530 =>2,890.

year 1 allocation = 530 + (2890/2)

=>1.975.

year 2 allocation = 2890/2=>1,445.

salaries expense = let x be salary per month:

for 9 months only one employee received salary i.e 9x.

for remaining (24 -9)=>15 months two employees received salary =>2*15x

=>30x.

so year one salary allocation = 38,480 * (9x + (3months*2x)) /(30x+9x)

=>38,480*15x/39x

=>14,800.

salaries expense of year 2 =38,480-14,800

=>23,680.