Question

Keys Company showed the following account balances at the end of its first year (assume all accounts have normal balances):

                 Cash                                            $ 2,000

Equipment                                      5,000

Depreciation expense                     3,000

Service Revenue                           18,000

Prepaid insurance                           3,500

Accumulated Depreciation

--Equipment                                   2,000

Salaries and Wages expense            5,000

Accounts receivable                        2,500

Accounts payable                            2,000

Rent expense                                  2,500

Notes payable                                 3,000

Common stock                                1,000

Unearned Service Revenue              2,000

Dividends                                           500

Insurance expense                          3,000

Interest expense                             1,000         

Net income for the first year is:

Answer 1

Income Statement

Keys Company

Service Revenue		$18,000.00
Less Operating Expenses:-
Depreciation expense	$3,000.00
Salaries and Wages expense	$5,000.00
Rent expense	$2,500.00
Insurance expense	$3,000.00
Total Operating Expenses		$(13,500.00)
Net operating Income		$4,500.00
Less :-Interest expense		$(1,000.00)
Net Income		$3,500.00

Since Keys Company is a Service Company as it do not sell any product, The income Statement will not contain any Cost of goods sold. Therefore the income statement is basic breakdown of income and expenses.

And Income Formula for the Same is.

Net Income =Revenue-Expenses.

Accounts which are not taken in Net income are:

1.Equipment -It’s a fixed asset it will appear in Balance Sheet

2. Prepaid Insurance-It’s a Current Asset which indicates Cost of the insurance paid in advance so its taken in balance sheet but Insurance Expenses is a part of Income Statement/Net Income

3.Accumulated Depreciation – It’s a total Depreciation which is total depreciation expenses reported from the time asset is acquired.

4.Accounts Receivables and Accounts Payable -These are current asset and are part of Balance sheet.

5.Common stock – Part of Balance sheet

6.Dividends - Dividends on common stock are not reported on the income statement since they are not expenses. However, dividends on preferred stock will appear on the income statement

7.Unearned Service Revenue – As name says its unearned, therefore not considered in Net income and recorded in Balance Sheet