I\'m having trouble with question 3P of Chapter 3 in Principals of Managerial Fi

ID: 2727348 • Letter: I

Question

I'm having trouble with question 3P of Chapter 3 in Principals of Managerial Finance, 14th edition. Can you please help me? Thank you.

Income statement preparation On December 31, 2015, Cathy Chen, a self-employed certified public accountant (CPA), completed her first full year in business. During the year, she billed $360,000 for her accounting services. She had two employees, a bookkeeper and a clerical assistant. In addition to her monthly salary of $8,000, Ms. Chen paid annual salaries of $48,000 and $36,000 to the bookkeeper and the clerical assistant, respectively. Employment taxes and benefit costs for Ms. Chen and her employees totaled $34,600 for the year. Expenses for office supplies, including postage, totaled $10,400 for the year. In addition, Ms. Chen spent $17,000 during the year on tax-deductible travel and entertainment associated with client visits
and new business development. Lease payments for the office space rented (a tax deductible expense) were $2,700 per month. Depreciation expense on the office furniture and fixtures was $15,600 for the year. During the year, Ms. Chen paid
interest of $15,000 on the $120,000 borrowed to start the business. She paid an average tax rate of 30% during 2015.
a. Prepare an income statement for Cathy Chen, CPA, for the year ended December
31, 2015.
b. Evaluate her 2015 financial performance.

Explanation / Answer

A. Cathy Chen

Income Statement

For the year ended December. 31, 2015

Service Revenue

$ 360,000

Expenses:

Salaries and wages expense (8000*12) +48000+36000

$ 180,000

Employment taxes and benefit

$ 34,600

Office supplies and postage

$ 10,400

Travel and entertainment

$ 17,000

Rent Expense (2700*12)

$ 32,400

Depreciation expense

$ 15,600

Interest Expense

$ 15,000

Total Expenses

$ 305,000

Income before tax

$ 55,000

Less: Taxes = 55000*30% =

$ (16,500)

Net income

$ 38,500

B. Cathy can has performed well financially as it has Net income positive.