Question

You are to write a memo, in proper memo format, to Jane Ross, a potential client of yours who has requested advice about some items on the income statement for the year ending December 31, 2011 that she has personally prepared. She had a beginning accounting class many years ago and is unsure of a few of items. They are:

1. She recorded revenue of $1,500 representing the amount collected for a newsletter that her company is producing for the first time. Each person subscribing to the newsletter has paid for a year’s subscription price. All the subscriptions were sold on March 1 of 2011 and the subscriptions are for a year.
2. She also recorded revenue of $1,000 representing the amount collected for selling gift cards to customers. The customers can redeem the gift cards for merchandise anytime they wish. At the end of the year, one fourth of the gift cards had been redeemed.
3. She recorded revenue (gain) of $5,000 for some equipment sold. The customer paid $50 down and is going to see if the equipment meets their needs. If the equipment does not meet their needs they can return it within 30 days but they forfeit the $50 deposit. Her prior experience with this equipment is that most people end up returning the equipment.

When you write the memo, explain how each of these items should affect income and why. Also give the dollar change to her income resulting from any changes you suggest.

Solution Preview

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The income statement shows the revenues and expenses of the business for a particular period of time. As per the accounting principles, the income statement should present an unbiased and fair picture of the profitability of the operations and should record its revenues and expenses in a fair manner. Expenses are generally incurred in the period they occur. If the benefits are expected to be realized for a long period of time (more than an accounting year), they are capitalized. On the other hand, revenues are recorded when the products/services are delivered to the consumer and the title also passes to the consumer...

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