Houston Corporation was formed during 2009 by Glenda Lee. Glenda is the president and sole stockholder. At December 31, 2010, Glenda prepared an income statement for Houston Corporation. Glenda is not an accountant, but she thinks she did a reasonable job preparing the income statement by looking at the financial statements of other companies. She has asked you for advice. Glenda’s income statement appears as follows.

HOUSTON CORPORATION

Income Statement

For the Year Ended December 31, 2010

Accounts receivable ..........$17,000

Revenue ................ 50,000

Rent expense .............. 12,000

Insurance expense ............ 7,000

Vacation expense ........... 2,000

Net income .............. 58,000

Glenda has also provided you with these facts.

1. Included in the revenue account is $3,000 of revenue that the company earned and received payment for in 2009. She forgot to include it in the 2009 income statement, so she put it in this year’s statement.

2. Glenda operates her business out of the basement of her parents’ home. They do not charge her anything, but she thinks that if she paid rent it would cost her about $12,000 per year. She, therefore, included $12,000 of rent expense in the income statement.

3. To reward herself for a year of hard work, Glenda went to Greece. She did not use company funds to pay for the trip, but she reported it as an expense on the income statement since it was her job that made her need the vacation.

Instructions

(a) Comment on the proper accounting treatment of the three items above.

(b) Prepare a corrected income statement for Houston Corporation.