Problem 14.3A Reconstructing an income statement to reflect proper accounting pr
ID: 2588446 • Letter: P
Question
Problem 14.3A Reconstructing an income statement to reflect proper accounting principles. LO 14-5, 14 6 Samuel Cox, owner of Cox Video Center, sent the income statement shown below to several of his creditors who had asked for financial statements. The business is a sole proprietorship that sells audio and other electronic equipment. One of the creditors looked over the income statement and reported that it did not conform to generally accepted accounting principles. Cox Video Center Income Statement December 31, 2019 $691,000 Cash Collected from Customers Cost of Goods Sold Merchandise Inventory, Jan. 1 Payments to Suppliers $ 79,000 442,000 521,000 89,000 Less Merchandise Inventory, Dec. 31 Cost of Goods Sold Gross Profit on Sales Operating Expenses Salaries of Emp loyees Salary Office Expense Depreciation Expense Income Tax of Owner Payroll Taxes Expense Advertising and Other Selling Expenses Repairs Expense Insurance Expense Interest Expense Utility and Telephone Expense Legal and Audit Expense Miscellaneous Expense Total Expenses Net Loss from Operations Increase in Appraised Value of Land During Year Net Income 432,000 259,000 80,100 33,600 30,600 20,720 7,600 8,600 22,500 11,600 4,000 11,600 18,100 3,100 28,100 of owner 280,220 (21,220) 24,000 $ 2,780 The following additional information was made available by Cox: a. On January 1, 2019, accounts receivable from customers totaled $26,300. On December 31, 2019, the receivables totaled $32,600. b. No effort has been made to charge off worthless accounts. An analysis shows that $2,000 of the accounts receivable on December 31, 2019, will never be collected. c. The beginning and ending merchandise inventories were valued at their estimated selling price. The cost of the ending inventory is determined to be $48,100, and the cost of the beginning inventory is determined at $44,400. d. On January 1, 2019, suppliers of merchandise were owed $38,800, while on December 31, 2019, these debts were $45,025. e. The owner paid himself a salary of $2,800 per month from the funds of the business and charged this amount to an account called f. The owner also withdrew cash from the firm's bank account to pay himself $5,100 interest on his capital investment. This amount g. A check for $7,600 to cover the owner's personal income tax for the previous year was issued from the firm's bank account. This h. Depreciation on assets was computed at 8 percent of the gross profit. An analysis of assets showed that the original cost of the Salary of Owner was charged to Interest Expense. was charged to Income Tax of Owner. equipment and fixtures was $63,300. Their estimated useful life is 12 years with no salvage value. The building cost $149,500. Its useful life is expected to be 25 years with no salvage value i. Included in Repairs Expense was $6,800 paid on December 22 for a new parking lot completed that day j. The increase in land value was based on an appraisal by a qualified real estate appraiser.Explanation / Answer
Cox Video Center
Income Statement
Year Ended December 31, 2019
Particulars
Amount
Sales (cash & Credit)
697300
Cost of Goods Sold
Opening Inventory
44400
Add: Purchase during the period
448225
Less: Closing Inventory
48100
Cost of Goods Sold
444525
Gross Profit
252775
Operating Expenses
Salaries of Employees
$80,100
Office Expenses
30600
Depreciation Expenses
11255
Income tax of owner
7600
Payroll Taxes expenses
8600
Advertising and other selling expenses
22500
Repair expenses
4800
Insurance expenses
4000
Interest expenses
11600
Utility and telephone expenses
18100
Legal and audit expenses
3100
Bad Debts
2000
Miscellaneous expenses
28100
Total Operating Expenses
$232,355
Net Profit from Operation
$20,420
Notes:
1 Sales = Cash collected from customer-Opening Accounts receivables+Closing accounts receivables
= $691000-26300+32600
= $697300
2. Purchase = Payments to suppliers-Opening accounts payable+closing accounts payable
= $442000-38800+45025
= $448225
3. Owner's Salary/drawings does not form a part of Income statement. It get deducted from owners capital Investment
appears in balance sheet
4. Depreciation Expenses
Depreciation on Equipment = cost/number of years
= 63300/12
= 5275
Depreciation on Building = 149500/25
= 5980
Total Depreciation expenses = 5275+5980
= 11255
5. In Sole propreitorship, there is no need to file separate return for business, owner show profit from business
in his personal income tax return, and pay the taxes accordingly. Thus, taxes paid for business are shown in
income statement
6. Repair expenses include $6800 paid for parking lot completed on Dec 22. Parking lot is a part of land improvement.
Thus, it will not come under repair expenses.
7. Interest expenses paid to owner on Capital investment is allowed.
8.Bad debts to be charged off for uncollectable accounts receivables
Cox Video Center
Income Statement
Year Ended December 31, 2019
Particulars
Amount
Sales (cash & Credit)
697300
Cost of Goods Sold
Opening Inventory
44400
Add: Purchase during the period
448225
Less: Closing Inventory
48100
Cost of Goods Sold
444525
Gross Profit
252775
Operating Expenses
Salaries of Employees
$80,100
Office Expenses
30600
Depreciation Expenses
11255
Income tax of owner
7600
Payroll Taxes expenses
8600
Advertising and other selling expenses
22500
Repair expenses
4800
Insurance expenses
4000
Interest expenses
11600
Utility and telephone expenses
18100
Legal and audit expenses
3100
Bad Debts
2000
Miscellaneous expenses
28100
Total Operating Expenses
$232,355
Net Profit from Operation
$20,420
Notes:
1 Sales = Cash collected from customer-Opening Accounts receivables+Closing accounts receivables
= $691000-26300+32600
= $697300
2. Purchase = Payments to suppliers-Opening accounts payable+closing accounts payable
= $442000-38800+45025
= $448225
3. Owner's Salary/drawings does not form a part of Income statement. It get deducted from owners capital Investment
appears in balance sheet
4. Depreciation Expenses
Depreciation on Equipment = cost/number of years
= 63300/12
= 5275
Depreciation on Building = 149500/25
= 5980
Total Depreciation expenses = 5275+5980
= 11255
5. In Sole propreitorship, there is no need to file separate return for business, owner show profit from business
in his personal income tax return, and pay the taxes accordingly. Thus, taxes paid for business are shown in
income statement
6. Repair expenses include $6800 paid for parking lot completed on Dec 22. Parking lot is a part of land improvement.
Thus, it will not come under repair expenses.
7. Interest expenses paid to owner on Capital investment is allowed.
8.Bad debts to be charged off for uncollectable accounts receivables