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Exercise 7-21B Complete the accounting cycle using long-term asset transactions (LO7-4, 7-7)

Prepare a multiple-step income statement for the period ended January 31, Year 1.

[The following information applies to the questions displayed below.]
  
On January 1, Year 1, the general ledger of a company includes the following account balances:
  

Accounts	Debit				Credit
Cash	$	59,100
Accounts Receivable		25,800
Allowance for Uncollectible Accounts					$	2,600
Inventory		36,700
Notes Receivable (5%, due in 2 years)		16,800
Land		159,000
Accounts Payable						15,200
Common Stock						224,000
Retained Earnings						55,600
Totals	$	297,400			$	297,400

  
During January Year 1, the following transactions occur:
  

January		1		Purchase equipment for $19,900. The company estimates a residual value of $1,900 and a five-year service life.
January		4		Pay cash on accounts payable, $9,900.
January		8		Purchase additional inventory on account, $86,900.
January		15		Receive cash on accounts receivable, $22,400.
January		19		Pay cash for salaries, $30,200.
January		28		Pay cash for January utilities, $16,900.
January		30		Sales for January total $224,000. All of these sales are on account. The cost of the units sold is $117,000.

Information for adjusting entries:

1. Depreciation on the equipment for the month of January is calculated using the straight-line method.
2. The company estimates future uncollectible accounts. The company determines $3,400 of accounts receivable on January 31 are past due, and 50% of these accounts are estimated to be uncollectible. The remaining accounts receivable on January 31 are not past due, and 3% of these accounts are estimated to be uncollectible. (Hint: Use the January 31 accounts receivable balance calculated in the general ledger.)
3. Accrued interest revenue on notes receivable for January.
4. Unpaid salaries at the end of January are $33,000.
5. Accrued income taxes at the end of January are $9,400.

rev: 11_22_2018_QC_CS-148298, 06_13_2019_QC_CS-170054

Exercise 7-21B Part 4

4. Prepare a multiple-step income statement for the period ended January 31, Year 1.

Answer 1

Solution: According to the Question, we need to prepare Income Statement of the company:

	($)	Amount ($)
Sales Revenue		$224,000
Cost of Goods sold-		$117,000
Gross profit		$107,000
Less: Operating Expenses
Salaries Expense	$63,200
Utilities Expense	$16,900
Depreciation-eqp	$300
Bad Debts	$5,820
Total Operating Expenses-		$86,220
Operating Income		$20,780
Add: Interest Income		$70
Net Income Before Taxes		$20,850
Income Tax		$9,400
Net Income-		$11,450

Working Notes:

1. Calculation of Allowance for Uncollectible Accounts and Bad Debts:

3,400*50% (past due)	$1,700
$224,000*3% (sales)	$6,720
Total Allowance for Uncollectible Accounts	$8,420
Less: Beginning Balance-	$2,600
Bad Debts-	$5,820

2.Calculation of Interest Receivable= {$16,800*5%}/12= $70

3.Calculation of Depreciation on Equipment= Cost-Residual Value/ Useful Life

={$19,900-$1,900/5}/12= $300