Question

Happy Camper Park was organized on April 1, 2016, by Barbara Evans. Barbara is a good manager but a poor accountant. From the trial balance prepared by a part-time bookkeeper, Barbara prepared the following income statement for the quarter that ended March 31, 2017.

HAPPY CAMPER PARK

Income Statement

For the Quarter Ended March 31, 2014

Revenues

Rent revenue

$90,000

Operating expenses

Advertising

$5,200

Salaries and wages

29,800

Utilities

900

Depreciation

800

Maintenance and repairs

4,000

Total operating expenses

40,700

Net income

$49,300

Barbara thought that something was wrong with the statement because net income had never exceeded $20,000 in any one quarter. Knowing that you are an experienced accountant, she asks you to review the income statement and other data.

You first look at the trial balance. In addition to the account balances reported above in the income statement, the ledger contains the following additional selected balances at March 31, 2014.

Supplies $6,200

Prepaid Insurance 7,200

Notes Payable 12,000

You then make inquiries and discover the following.

1. Rent revenues include advanced rentals for summer occupancy $15,000.

2. There were $1,700 of supplies on hand at March 31.

3. Prepaid insurance resulted from the payment of a one-year policy on January 1, 2017.

4. The mail on April 1, 2017, brought the following bills: advertising for week of March 24, $110; repairs made March 10, $260; and utilities, $180.

5. There are four employees, who receive wages totaling $300 per day. At March 31, 2 days salaries and wages have been incurred but not paid.

6. The note payable is a 3-month, 10% note dated January 1, 2017.

a) Prepare a correct income statement for the quarter ended March 31, 2017.

b) Explain to Barbara the generally accepted accounting principles that she did not recognize in preparing her income statement and their effect on her results.

Answer 1

a)

Income Statement (revised):
	Previous amount	Adjustments	Revised Amounts
Revenue	90000	less advance rental $15000	75000
Less: Operating Exp.:
Advertising	5200	add: Bills payable 110	5310
Salaries and wages	29800	add: wages payable 600	30400
Utilities	900	add: Bills payable 180	1080
Depre	800		800
Maintenance and repairs	4000	add: Bills payable 260	4260
supplies exp	0	6200-1700	4500
Insurance	0	7200*2/12	1200
Interest exp	0	12000*10%*2/3	800
Total Operating expenses:	40700		48350
Net Income	49300		26650

b) Barbara is not recognizing the Accrual accounting principle according to which the period's revenues should be matched with the period's expenses. All the revenues belongs to the future but received in present period, should be reduced from the present revenues. Likewise, all expenses which are paid in future but belongs to present period should be included in expenses to come out with perfect accrual based accounting.