Answer:
1. Net income
For Year 2 = $115,000
For Year 3 = $190,000
2. The amount which is due to the advertising agency is $20,000
Explanation:
1. The computation of the net income for year 2 and year 3 is shown below:
For Year 2 = Amounts billed to customers for services - Payment of rent - Salaries paid to employees for services rendered during the year - Travel and entertainment - advertising expense
= $350,000 - $40,000 - $140,000 - $30,000 - $25,000
= $115,000
For Year 3 = Amounts billed to customers for services - Payment of rent - Salaries paid to employees for services rendered during the year - Travel and entertainment
= $450,000 - $40,000 - $160,000 - $40,000 - $20,000
= $190,000
The rent payment is for the 2 years so the amount is divided equally.
And, the advertising expenditure is $25,000 for the year 2 and $20,000 for the year 3 ($25,000 - $5000)
2. The computation of the amount which is due to the advertising agency is shown below:
Advertising agency owed at the end of the year 1 $5,000
Advertising cost at the end of year 2 $25,000
Total amount = $30,000
Less: advertising expense paid in the year 2 ($15,000)
Less: advertising expense paid in the year 2 ($35,000)
The amount which is due to the advertising agency = $20,000
