Question

Lewis and Associates has been in the termite inspection and treatment business for five years. The following is a list of accounts for Lewis on June 30, 2017. It reflects the recurring transactions for the month of June but does not reflect any month-end adjustments:
Cash ………………………………………………. $6,200
Accounts Receivable ………………………………10,400
Prepaid Rent ……………………………………….. 4,400
Chemical Inventory ………………………………....9,400
Equipment …………………………………………..18,200
Accumulated Depreciation ………………………….1,050
Accounts Payable ………………………………….. 1,180
Capital Stock ………………………………………....5,000
Retained Earnings ……………………………….. ...25,370
Treatment Revenue ………………………………....40,600
Wages and Salary Expense ………………………. 22,500
Utilities Expense ………………………………….....1,240
Advertising Expense ……………………………….. 860
The following additional information is available:
a. Lewis rents a warehouse with office space and prepays the annual rent of $4,800 on May 1 of each year.
b. The asset account Equipment represents the cost of treatment equipment, which has an estimated useful life of ten years and an estimated salvage value of $200.
c. Chemical inventory on hand equals $1,300.
d. Wages and salaries owed but unpaid to employees at the end of the month amount to $1,080.
e. Lewis accrues income taxes using an estimated tax rate equal to 30% of the income for the month.
Required:
1. For each of the items of additional information, (a) through (e), identify and analyze the necessary adjustment on June 30, 2017.
2. On the basis of the information you have, does Lewis appear to be a profitable business?

Answer 1

Answer:

Lewis and Associates

1. Identification and Analysis of the items of additional information:

a. Rent Expense $400 Prepaid Rent $400

b. Depreciation Expense $150 Accumulated Depreciation $150

c.Cost of Chemical Used $8,100  Chemical Inventory $8,100

d. Wages and Salary Expense $1,080 Wages and Salary Payable $1,080.

e. Income Tax Expense $1,905 Income Tax Payable $1,905

2. On the basis of the information, Lewis and Associates appears to be a profitable business, making a margin of 11% in after-tax income.

Explanation:

a) Additional Data and Analysis:

a. Rent Expense $400 Prepaid Rent $400

b. Depreciation Expense $150 Accumulated Depreciation $150

c.Cost of Chemical Used $8,100  Chemical Inventory $8,100

d. Wages and Salary Expense $1,080 Wages and Salary Payable $1,080.

e. Income Tax Expense $1,905 Income Tax Payable $1,905

30% of the income for the month.

Income Statement for the Month Ended June 30

Treatment Revenue               $40,600

Cost of Treatment Chemical      8,100

Gross profit                            $32,500

Expenses:

Wages and Salary      $23,500

Utilities                             1,240

Advertising                        860

Depreciation                      150

Rent                                  400

Total expenses                        $26,150

Income before taxes                $6,350

Income taxes                               1,905

Net income                               $4,445