ABC Company began operations in April, 2007 by selling common stockto owners in
ID: 2457826 • Letter: A
Question
ABC Company began operations in April, 2007 by selling common stockto owners in exchange for $70,000. During 2007, ABC Companyentered into the following transactions:(1.) On April 23, ABC Company purchased inventory for $40,000cash.
(2.) On May 1, ABC Company purchased a three-year insurance policyfro $18,000 cash.
(3.) On June 1, ABC Company received $45,000 cash from a customerfor services to be performed over the next 18 months.
(4.) On August 1, ABC Company sold one-half of the inventorypurchased on April 23 to a customer for $35,000 cash.
Calculate the amount of net income that ABC Company would report inits 2007 income statement after all the above transactions arerecorded and all necessary adjusting entries are made at December31, 2007. Don't use decimals in your answer.
Explanation / Answer
Journal Entries recorded during the year. Apr 23 Inventory Dr 40,000 Cash 40,000 May 1 PrepaidInsurance Dr 18,000 Cash 18,000 June1 Cash Dr 45,000 Unearned revenue 45,000 Aug 1 Cash Dr 35,000 Sales revenue 35,000 Cost of goods sold Dr 20,000 Inventory 20,000 Adjusting Entries on Dec 31,07 Dec 31 , 07 1. Insurance expense Dr 4,000 Prepaid insurance 4,000 ( 18,000 * 8/ 36) 2. Unearned revenue Dr 17,500 Service revenue 17,500 (45,000* 7/18) ABC company Income statement For the year ended Dec 31, 07 SalesRevenue 35,000 ServiceRevenue 17,500 Totalrevenue 52,500 - cost of goodssold 20,000 GrossMargin 32,500 -Insuranceexpenses 4,000 Netincome 28,500
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