91Ó°ÊÓ

One year ago, Tyler Stasney founded Swift Classified Ads. Stasney remembers that you took an accounting course while in college and comes to you for advice. He wishes to know how much net income his business earned during the past year in order to decide whether to keep the company going. His accounting records consist of the T-accounts from his ledger, which were prepared by an accountant who moved to another city. The ledger at December 31 follows. The accounts have notbeen adjusted.

Stasney indicates that at year-end, customers owe the business \(1,600 for accrued service revenue. These revenues have not been recorded. During the year, Swift Classified Ads collected \)4,000 service revenue in advance from customers, but the business earned only \(900 of that amount. Rent expense for the year was \)2,400, and the business used up \(1,700 of the supplies. Swift determines that depreciation on its equipment was \)5,000 for the year. At December 31, the business owes an employee $1,200 accrued salary. Help Swift Classified Ads compute its net income for the year. Advise Stasney whether to continue operating Swift Classified Ads.

Step by step solution

01

Preparation of Adjusted Trial balance

Adjusted Trial Balance
Particular	Unadjusted Amount	Adjustments	Adjusted Amount
	Dr.	Cr.	Dr.	Cr.	Dr.	Cr.
Cash	$ 5,800		$ 4,000		$ 9,800
Accounts Receivable	12,000		1,600		13,600
Prepaid Rent	2,800			$ 2,400	400
Office Supplies	2,600			1,700	900
Equipment	36,000				36,000
Accumulated Depreciation – Equipment				5,000		$ 5,000
Accounts Payable		$ 21,500				21,500
Unearned Revenue		4,000		3,100		7,100
Salaries payable				1,200		1,200
Common Stock		20,000				20,000
Dividends	28,000				28,000
Service Revenue		59,500		2,500		62,000
Salaries Expense	17,000		1,200		18,200
Depreciation Expense – Equipment			5,000		5,000
Rent Expense			2,400		2,400
Utility Expense	800				800
Supplies Expense			1,700		1,700
Total	$ 105,000	$ 105,000	$ 15,900	$ 15,900	$116,800	$116,800

02

Computation of net income

Income Statement
Particular		Amount
Service revenue		$ 62,000
Less: Expenses
Salaries Expense	$ 18,200
Depreciation Expense	5,000
Rent Expense	2,400
Utility Expense	800
Supplies Expense	1,700	28,100
Net Income		$ 33,900

The company can continue its business as net income is a positive good figure having around 50% of sales revenue.

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