The income statement shown below was prepared by Karen Carter, owner of Karens Beauty Supplies. The business

The income statement shown below was prepared by Karen Carter, owner of Karen’s Beauty Supplies. The business is a sole proprietorship that sells skin and hair care products. An accountant who looked at the income statement told Carter that the statement does not conform to generally accepted accounting principles.

INSTRUCTIONS

Prepare an income statement for Karen’s Beauty Supplies in accordance with generally accepted accounting principles.

The following additional information was made available by Carter:

a. On January 1, 2019, accounts receivable from customers totaled $17,500. On December 31, 2019, receivables totaled $15,125.

b. On December 31, 2019, accounts receivable amounting to $1,100 were expected to be uncollectible.

c. On January 1, 2019, accounts payable owed to merchandise suppliers were $11,000. On December 31, 2019, the outstanding accounts payable were $17,855.

d. Included in Salaries Expense is $9,000 that Carter was “paid” for her personal work in the business.

e. Included in Interest Expense is $1,700 that Carter withdrew as interest on her capital investment.

f. Miscellaneous repairs of $750 were charged to Store Equipment during the year. No new equipment was purchased.

g. Carter explains that since the estimated value of her store equipment has increased by $3,750 during the year, no depreciation expense was recorded. The store equipment cost $28,000 and had an estimated useful life of 10 years with estimated salvage value of $2,000.

Analyze: The entries required to correct situations a.–g. would affect several permanent accounts for Karen’s Beauty Supplies. List the permanent accounts affected.

Transcribed Image Text:

Karen's Beauty Supplles Income Statement Year Ended December 31, 2019 Cash Recelpts from Customers $255.000 Cost of Goods Sold $ 19,000 Merchandise Inventory, Jan. 1 Payments to Creditors 176,000 195,000 Less Merchandise Inventory, Dec. 31 25,000 170,000 Cost of Goods Sold Gross Profit on Sales 85,000 Expenses Salarles Expense $ 32,500 Insurance Expense Payroll Taxes Expense Repalrs Expense 1,600 2,800 1,850 Supplies and Other Office Expenses 3,750 Advertising and Other Selling Expenses 6,400 Utilites Expense 3,200 Interest Expense 3,350 Total Expenses 55,950 Net Income from Operations 29,550 Increase in Market Value of Store Equipment 3,750 Net Income for Year $ 33,300