An inexperienced accountant for Prestwick Company prepared the following income statement for the month of August 2015:
AUGUST 31, 2015
|Services provided to customers||$17,000|
|Investment by stockholders||5,000|
|Loan from bank||15,000||$37,000|
|Payments to long-term creditors||$11,700|
|Expenses required to provide services to customers||7,800|
|Purchase of land||16.000||35,500|
Prepare a revised income statement in accordance with generally accepted accounting principles.
The income statement is a statement of net earnings of an entity and includes all revenues, income, expenses, and losses. All transactions are classified into capital transactions and revenue transactions depending on the nature of the transactions. Revenue transaction are reported in the income statement whereas capital transactions are reported in the balance sheet.
Answer and Explanation:
Revised income statement under the US GAAP:
|Services provided to customers||$17,000.00|
|Expenses required to provide services to customers||$7,800.00|
1. Investment by stockholders: this is an equity transaction and must be reported in the balance sheet under stockholders' equity.
2. A loan from bank: this is a debt-transaction and must be reported as a liability in the balance sheet.
3. Payments to long-term creditors: This is an operating transaction and must be reported as a deduction from the cash account. Also, it is reported in the Statement of cash flow if prepared under the direct method.
4. Purchase of land: this is a capital transaction and must be reported as an asset in the balance sheet.
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from Accounting 101: Financial AccountingChapter 2 / Lesson 2