Question

Walters Corporation was formed during 2013 by John Walters. John is the president and sole stockholder. At December 31, 2014, John prepared an income statement for Walters Corporation. John is not an accountant, but he thinks he did a reasonable job preparing the income statement by looking at the financial statements of other companies. He has asked you for advice. John’s income statement appears as follows.
WALTERS CORPORATION
Income Statement
For the Year Ended December 31, 2014
Accounts receivable......... $17,000
Service revenue........... 40,000
Rent expense........... 10,000
Insurance expense.......... 7,000
Vacation expense........... 6,000
Net income............. $34,000

John has also provided you with these facts.
1. Included in the service revenue account is $3,000 of revenue that the company provided service for and received payment for in 2013. He forgot to include it in the 2013 income statement, so he put it in this year’s statement.
2. John operates his business out of the basement of his parents’ home. They do not charge him anything, but he thinks that if he paid rent it would cost him about $10,000 per year. He, therefore, included $10,000 of rent expense in the income statement.
3. To reward himself for a year of hard work, John went to Turkey. He did not use company funds to pay for the trip, but he reported it as an expense on the income statement since it was his job that made him need the vacation.

Instructions
(a) Comment on the proper accounting treatment of the three items above.
(b) Prepare a corrected income statement for Walters Corporation.



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  • CreatedApril 07, 2014
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