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Case Answer (8068)

Erica Hatt manages Happy Camper Park and asked an accountant to review the income statement she prepared for the quarter ending March 31, 2017. The income statement reported much higher net income than usual. The accountant found issues with revenue recognition of advanced summer rentals and expense recognition of liabilities incurred but not paid by the end of the quarter. Preparing the income statement correctly, net income was $26,550, significantly less than Erica's reported amount. The accountant explained to Erica the revenue and expense recognition principles she did not follow in preparing the initial statement.

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Ali Al Ajami
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119 views3 pages

Case Answer (8068)

Erica Hatt manages Happy Camper Park and asked an accountant to review the income statement she prepared for the quarter ending March 31, 2017. The income statement reported much higher net income than usual. The accountant found issues with revenue recognition of advanced summer rentals and expense recognition of liabilities incurred but not paid by the end of the quarter. Preparing the income statement correctly, net income was $26,550, significantly less than Erica's reported amount. The accountant explained to Erica the revenue and expense recognition principles she did not follow in preparing the initial statement.

Uploaded by

Ali Al Ajami
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Happy Camper Park was organized on April 1, 2016, by Erica Hatt.

Erica is a good manager but


a poor accountant. From the trial balance prepared by a part-time bookkeeper, Erica prepared the
following income statement for the quarter that ended March 31, 2017.

.:.
Erica thought that something was wrong with the statement because net income had never
exceeded $20,000 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 at March 31,
2017.
Supplies …………………………… $ 6,200
Prepaid Insurance ………………… 7,200
Notes Payable ……………………. 12,000
You then make inquiries and discover the following.
1. Rent revenues include advanced rentals for summer occupancy $15,000.
2. There were $1,700 of supplies on hand at March 31.
3. Prepaid insurance resulted from the payment of a one-year policy on January 1, 2017.
4. The mail on April 1, 2017, brought the following bills: advertising for week of March 24,
$110; repairs made March 10, $260; and utilities, $180.
5. There are four employees who receive wages totaling $300 per day. At March 31, 2 days’
salaries and wages have been incurred but not paid.
6. The note payable is a 3-month, 10% note dated January 1, 2017.
Instructions
With the class divided into groups, answer the following.
(a) Prepare a correct income statement for the quarter ended March 31, 2017.
(b) Explain to Erica the generally accepted accounting principles that she did not recognize in
preparing her income statement and their effect on her results.

SOLUTION:

(a)
HAPPY CAMPER PARK
Income Statement
For the Quarter Ended March 31, 2017

Revenues
Rent revenue ($90,000 – $15,000) $75,000
Expenses
Salaries and wages expense
   [$29,800 + ($300 X 2)] $30,400
Advertising expense ($5,200 + $110)   5,310
Supplies expense ($6,200 – $1,700)   4,500
Maintenance and repairs expense
   ($4,000 + $260)   4,260
Insurance expense ($7,200 X 3/12)   1,800
Utilities expense ($900 + $180)   1,080
Depreciation expense     800
Interest expense ($12,000 X 10% X 3/12) 300
Total expenses 48,450
Net income $26,550
(b) The generally accepted accounting principles pertaining to the income statement that
were not recognized by Erica were the revenue recognition principle and the expense
recognitionprinciple. The revenue recognition principle states that revenue is recognized
when the performance obligation is satisfied. The $15,000 for summer rentals has not
been performed and, therefore, should not be reported in income for the quarter ended
March 31. The expense recognition principle dictates that efforts (expenses) be matched
with accomplishments (revenues) whenever it is reasonable and practicable to do so. This
means that the expenses should include amounts incurred in March but not paid until
April. The difference in expenses was $7,750 ($48,450 – $40,700). The overstatement of
revenues ($15,000) plus the understatement of expenses ($7,750) equals the difference in
reported income of $22,750 ($49,300 – $26,550).

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