Question

Presented below isthe comparative statement of income, prepared on a cash basis, for Mingwei Ltd. for the past two years. The manager is puzzled by the fact that net income was lower in2023than 2022.MINGWEI LTD.Statementof Income, Cash BasisYears EndedDecember 31——————————————————————————————————————————20232022Service revenue.........................................................................$350,000$365,000ExpensesSalaries expense.................................................................200,000190,000Office expense....................................................................54,00055,000Repairs and maintenance expense.....................................20,00015,000Interest expense..................................................................15,0002,000Total expenses...........................................................................289,000262,000Income before income tax..........................................................61,000103,000Income tax expense...................................................................24,40041,200Net income.................................................................................$ 36,600$ 61,800In talking with the manager, you gather the following information, which was not reflected in the above statements:1.The company borrowed $200,000 on June 1, 2022and repaid the amount with interest on June 1, 2023. The interest rate was 6%. The journal entry to record the repayment on June 1, 2023was:Bank Loan Payable.............................................200,000Interest Expense..................................................12,000Cash.............................................................212,0002.A customer made a deposit of $15,000 on December 1, 2022for services to be performed in January 2023. The journal entry made on December 1, 2022was:Cash....................................................................15,000Service Revenue..........................................15,0003.A bill for $4,000 maintenance work done inDecember 2022was paid on January 15, 2023. The journal entry to record the payment in 2023was:Repairs and Maintenance Expense.....................4,000Cash.............................................................4,000InstructionsAssuming that no adjusting entries were made for the above transactions, prepare a revised comparativestatement of incomefor 2022and 2023. (Income tax is calculated at 40% of income before income tax.)(15marks)

Answer 1

Hi,

Please find below the answer with step by step working and explanations.

Revised Income statement(after adjustments)
			2023	2022
Service revenue		$        365,000	$        350,000
Expenses
Salaries			$        200,000	$        190,000
Office Expenses		$          54,000	$          55,000
Repairs and Maintenance	$          16,000	$          19,000
Interest expense		$            8,000	$            9,000
Total expenses		$        278,000	$        273,000
Income before income tax	$          87,000	$          77,000
Less Income Tax Expense	$          34,800	$          30,800
Net Income		$          52,200	$          46,200

Workings and Step by step explanation to the adjustments:

Adjustments
a. Bank loan Interest Paid in 2023=12000
of which $7000 (belong to 7 months in 2022 from 1st June to 31 st Dec 2022)
Adjustment to income.
Deduct $7000 from interest paid in 2023 and add it to 2022(OF total interest 12000/- 7 months interest of 7000/- belongs to 2022)
				2023	2022
Interest expense recorded				15000	2000
Adjustment as mentioned above(7000 Int belongs to 2022)			-7000	7000
Revised Interest expense				8000	9000
b Cash deposit of $ 15000 for services to be performed in 2023,(received on 1st Dec 2022)
Adjustment to income
Deduct $15000 from 2022 sales revenue and add it to 2023 sales revenue
				2023	2022
Sales Revenue				350000	365000
Adjustment as mentioned above($15000 Service revenue cash received in Dec.2022 belong to 2023)		15000	-15000
Revised Sales revenue				365000	350000
c. Maintenance expenses of $ 4000 was incurred in Dec 2022 but was paid in Jan 2023 (15th Jan 2023)
Adjustments to income
Deduct this expense from 2023 and add it to 2022 expenses
				2023	2022
Repairs & Maintenance Expenses				20000	15000
Adjustments as mentioned above				-4000	4000
				16000	19000

Hope this is helpful.

All the best.