The Independent Book Shop Ltd. was formed on April 1, 2017. It is a small private corporation,
Question:
The Independent Book Shop Ltd. was formed on April 1, 2017. It is a small private corporation, run by Joanna Kay. On March 31, 2018, Joanna prepared the following income statement:
INDEPENDENT BOOK SHOP LTD.
Income Statement
Year Ended March 31, 2018
Revenues
Accounts receivable..................................$23,000
Service revenue.........................................41,000
Total revenues........................................$64,000
Expenses
Rent expense..........................................$12,000
Office expense..........................................5,000
Vacation expense.......................................4,000
Total expenses..........................................21,000
Profit before income tax...............................85,000
Income tax expense.....................................5,000
Net income............................................$90,000
Joanna admits that her knowledge of accounting is somewhat limited and is concerned that her income statement might not be correct. She gives you the following additional information:
1. Included in the Service Revenue account is $3,000 of revenue that the company expects to earn in April 2018. Joanna included it in this year's statement so she wouldn't forget about it.
2. Joanna operates her business in a converted carriage house attached to her parents' downtown home. They do not charge her anything for the use of this building, but she thinks that if she paid rent it would have cost her about $12,000 a year. She included this amount in the income statement as Rent Expense because of the "opportunity cost."
3. To reward herself after a year of hard work, Joanna took a vacation to Greece. She used personal 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) Identify any corrections that should be made to the income statement and explain why.
(b) Prepare a corrected income statement.
(c) What other financial statements should the Independent Book Shop prepare, assuming it follows Accounting Standards for Private Enterprises?
Financial StatementsFinancial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
Step by Step Answer:
a 1 Remove accounts receivable from the revenue section of the income statement since it is a curren...View the full answer
Financial Accounting Tools for Business Decision Making
ISBN: 978-1119368458
7th Canadian edition
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso, Barbara Trenholm, Wayne Irvine
