Question

Somerville Corporation began business in January 2017 as a commercial interior designing company. Shares of stock were issued to the owners in exchange for cash. A building was purchased by making a down payment in cash and signing a mortgage payable for the balance. Land was purchased by issuing bonds. Services are performed for local businesses and office buildings on open account, and customers are given 30 days to pay their accounts. The following amounts are from the records of the company at the end of its first month of operations:

Account Name			Balance
Accounts Receivable			24,550
Capital Stock (i.e. Common Stock)			80,000
Cash			55,050
Supplies Inventory			5,000
Prepaid Rent			1,000
Design Revenue			45,900
Dividends			5,500
Land			100,000
Accumulated Depreciation			10,480
Building			262,000
Accounts Payable			5,000
Mortgage Payable			230,000
Salaries Payable			4,500
Income Taxes Payable			6,936
Bonds Payable			100,000
Rent Expense			3,800
Depreciation Expense			10,480
Retained Earnings			?
Income Tax Expense			6,936
Salary and Wage Expense			8,500
1. Using the data given, prepare an Income Statement for the month ended January 31, 2017. (2 points)

Answer 1

1) The income statement for the month ended January 31, 2017 is shown as follows:-

Somerville Corporation

Income Statement

For the Month Ended January 31, 2017 (Amounts in $)

Design Revenue (A)	45,900
Expenses:-
Rent Expense	3,800
Depreciation Expense	10,480
Income Tax Expense	6,936
Salary and Wage Expense	8,500
Total Expenses (B)	29,716
Net Income (A-B)	16,184

The net income of $16,184 will be added to retained earnings and dividends will be deducted from retained earnings.

The Balance Sheet as on January 31, 2017 is shown as follows:-

Somerville Corporation

Balance Sheet

As On January 31, 2017 (Amounts in $)

Assets
Accounts Receivable		24,550
Cash		55,050
Supplies Inventory		5,000
Prepaid Rent		1,000
Land		100,000
Building	262,000
Accumulated Depreciation	(10,480)	251,520
Total Assets		437,120
Liabilities and Stockholder's Equity
Liabilities
Accounts Payable		5,000
Mortgage Payable		230,000
Salaries Payable		4,500
Income Taxes Payable		6,936
Bonds Payable		100,000
Stockholder's Equity
Capital Stock		80,000
Retained Earnings (16,184 net income-5,500 dividends)		10,684
Total Liabilities and Stockholder's Equity		437,120

As the company started its business from January 1, 2017, the beginning balance of retained earnings is zero.