Question

Can you please confirm if the answers are correct. Thank you

1. Carol has already purchased Inventory of $10,000
2. Carol has already purchased $10,000 in equipment.
3. Carol will also keep a $10,000 as a Beginning Cash Balance.
4. Carol will have Accounts Payables of $10,000 (supplier credit for the inventory).
5. Carol’s friend who owns a Fitness Equipment store has agreed to give Benny a 1-year loan for the equipment needed of $10,000 (10% annual interest rate)

(this will be paid back with the interest at the end of year 1).

6. Carol will put in $10,000 of her own money as owner’s equity

II. An Income Statement for Year 1:

G. Carol forecasts that she will have 200 fitness class members paying a fitness membership of $500 annually).

8. Carol will pay herself a fixed salary of $50,000 a year and will hire a student part-time assistant for a few hours a week. The assistant will be paid $10,000 a year. Carol will pay a fixed payroll tax of 10% on total salaries, which can be deducted before taxes.
1. Carol will pay rent and utilities amounting to $20,000 a year.
10. Annual Depreciation expense on the equipment will use simple straight-line depreciation with no salvage value for a 10-year life
11. Carol will pay an annual interest expense of $1,000 for her loan for the first year of her operations paid at the end of the year.
12. Income taxes on Earnings Before Taxes will be taxed at a 25% rate.

	Balance Sheet
	Assets	Year 1
A	Cash	$10,000
B	Inventory	$10,000
C	Equipment	$10,000
	Total assets	$30,000
	Liability & Equity
D	Account Payable	$10,000
E	Note Payable	$10,000
	Total Liability	$20,000
	Equity
F	Owner' Investement	$10,000
	Total Liability & Equity	$30,000
	Income Statement
		Income Statement
G	Sales		100,000
	Expenses
H.1	Salary	60000
H.2	Payroll taxes	6000
I	Rent & Utility	20000
J	Depreciation Expense	1000
	Total Operating Expense		(87,000)
K	Interest Expense	(1000)
	Total non operating		(1000)
	Income before income taxes		12,000
L	Income tax expense 25%		3000
	Net Income		9,000

Answer 1

Information given in the Question are:

A. Inventory - $10000

B. Equipment - $10000

C. Cash - $10000

These are all Assets for Carol and are correctly shown under the head "Assets" in Balance Sheet.

Further;

D. Account Payable - $10000

E. Loan - $10000

These are the Liabilities for Carol as she will have to repay these in near future.

F. However, the amount invested by Carol in the business of $10000 is to be considered as her Own Investment.

So, these are correctly shown in the Balance Sheet.

Therefore, the Balance Sheet is correct.

Now, coming to the Income Statement-

G. Carol is expecting 200 members with a fees of $500. So, total revenue is $100000 ($500 x 200)

H. Carol will pay a total salary of $60000 ($50000 + $10000) and a payroll tax of $6000 ($60000 x 10%)

I. Annual expenses of $ 20000 is a revenue expenditure and is deductible in Income Statement

J. Depreciation on Equipment:

Cost of Equipment = $10000

Useful lIfe - 10 years

Therefore, depreciation per annum - $10000/10 = $1000

K. Interest expenses of $1000 is a revenue expenditure and is deductible in Income Statement

L. Income Taxes:

Earning Before Tax = Revenue - Operating Expenses - Non-Operating Expenses

Therefore, EBT = $100000 - ($60000+$6000+$20000+$1000) - $1000 = $12000

So, Income Tax = $3000 ($12000 x 25%)

Keeping the above discussions in mind, it seems that the answers are CORRECT.