[njgirl84]

Chapter 7 Problem 7-26

The following transactions apply to Artesia Co for 2012 its first year of operations and we had to do an income statement. These are the transactions:
1. Received $40000 from the issue of a short term not with 5% interest rate and a one year maturity. The not was issued on 4/1/2012.
2. Received $120000 cash plus applicable sales tax for performing services. Sales Tax was 6% which makes it $7200.
3. Paid $72000 cash for other expenses during the year.
4. Paid the sales tax due on $100000 (which would be $6000) of the service revenue for the year. Sales tax balance was not due until 2013.
5. Recognized accrued interest on 12/31/2012.

It tells me the net income on the side of $46500 for 2012, but somewhere I gained $100, because I keep coming up with $46600. My 2012 Income Statement looks like this:

Revenue = $120000
Operating Expenses = ($72000)
Interest Expense = ($1340)
Net Income is $46600

Can someone help me where this extra $100 came from? I've been working on this for the past couple of days going over my numbers over and over again. I couldn't sleep last night because of this extra money on the statement!

Thank you for the time!

[ArcSine]

Take your time with the ol' calculator. Your answer is actually

120,000 - 72,000 - 1,340 = 46,660; so 160 off from the book's answer rather than an even 100.

But moving on, the interest expense on the note (which was outstanding for 9 months) is

40,000 x 0.05 x 9/12 =

Solve that one for the interest expense, plug your new interest expense into your income statement, and re-calc the bottom line.

[njgirl84]

I realized my miscalculation after I pushed submit the question that is was $160. But if it was issued in April and that is the 4th month of the year, could I use 9 months? I've been having issues with this class, sorry, if I sound stupid.

[pready]

Your acrued interest should be for 9 months (Apr-Dec). So $40,000 * 5% * 9/12 = Acrued Interest. Your adjustment entry will be to Interest Expense and Interest Payable.