4 Revenue and Expenses
Income Statement Fundamentals
Jacqueline Gagnon
Let’s Practice
- First, My Turn!
- Hose Ltd. sells and repairs hydraulic and industrial hoses. At 31 December 20X3, it reported Retained Earnings of $680,000. Hose Ltd. has provided you with the following multi-step income statement and has asked you to (a) draft its closing entry at 31 December 20X3, and (b) calculate the revised balance of Retained Earnings after your journal entry.
| Hose Ltd. Income Statement (Multi-Step Format) |
||
|---|---|---|
| Sales | 1,725,500 | |
| Cost of Goods Sold | (756,000) | |
| Gross Profit | 969,500 | |
| Operating Expenses: | ||
| Freight in Expense | (1,000) | |
| Salaries & Wages Expense | (310,000) | |
| Employee Benefits Expense | (74,000) | |
| Office Expenses | (12,000) | |
| Utilities Expense | (23,000) | |
| Other Operating Expenses | (50,000) | (470,000) |
| Operating Income | 499,500 | |
| Other Income/Expenses; Gains and Losses: | ||
| Gain on Sale of Equipment | 10,000 | |
| Interest Expense | (15,500) | (5,500) |
| Income Before Income Taxes | 494,000 | |
| Income Tax Expense | (124,000) | |
| Net Income | 370,000 | |
Closing Entry.
Totals are included at the bottom of the entry to check that it balances.
| DR | Sales Revenue | 1,725,500 | ||
| CR | Cost of Goods Sold | 756,000 | ||
| CR | Freight in Expense | 1,000 | ||
| CR | Salaries & Wages Expense | 310,000 | ||
| CR | Employee Benefit Expense | 74,000 | ||
| CR | Office Expenses | 12,000 | ||
| CR | Utilities Expense | 23,000 | ||
| CR | Other Operating Expenses | 50,000 | ||
| DR | Gain on Sale of Equipment | 10,000 | ||
| CR | Interest Expense | 15,500 | ||
| CR | Income Tax Expense | 124,000 | ||
| CR | Retained Earnings | 370,000 | ||
| 1,735,500 | 1,735,500 |
Calculation of Retained Earnings
at 31 December 20X3:
| Retained Earnings | |||
|---|---|---|---|
| DR | CR | ||
| 680,000 | 01 Jan | ||
| 370,000 | 31 Dec | ||
| 1,050,000 | 31 Dec | ||
The post-closing balance of Retained Earnings at 31 December 20X3 is $1,050,000. This balance will be on the Statement of Changes in Equity and on the Statement of Financial Position.
Now, it’s your turn again:
Your Turn:4—4: Lemon Squeezy
Solution:4—4: Solution