Swire Travel was established on January 2012 by Clarice Keynes. Clarice is a good manager but a poor accountant. From the trial balance prepared by a part-time bookkeeper, Clarice prepared the following income statement for the quarter ended 31 March 2015.
Clarice knew that something was wrong with the statement because profit had never exceeded P200,000 in any one quarter. Knowing that you are an experienced accountant, she asks you to review the income statement and other data.
You first look at the trial balance. In addition to the account balances reported above in the income statement, the ledger contains the following additional selected balances as at 31 March 2015
| Supplies |
P 62,000 |
| Prepaid Insurance |
P 72,000 |
| Notes Payable |
P 120,000 |
You then make inquiries and discover the following.
1. Booking fees include advanced rentals for summer month occupancy P200,000.
2. There were P13,000 of supplies on hand as at 31 March.
3. Prepaid insurance resulted from the payment of a 1-year policy on 1 January 2015.
4. The mail on 1 April 2015 brought the following bills: advertising for week of 24 March, P1,100; repairs made 10 March , P2,600; and utilities, P1,800.
5. There are four employees, who receive wages totaling P3,500 per day. As at 31 March, 2 day's wages have been incurred but not paid.
6. The note payable is a 3-month, 10% note dated 1 January 2015.
Instructions:
a. Prepare a correct income statement for the quarter ended 31 March 2015.
b. Explain to Clarice the generally accepted accounting principles that she did not recognize in preparing her income statement and their effect on her results.
SWIRE TRAVEL Income Statement For the quarter ending 31 March 2015 Income Booking revenue Expenses Advertising P 52,000 298,000 Wages 9,000 Utilities 8,000 Depreciation 40,000 Repairs Net Profit P900,000 407,000 P493.000