Lone Pine Cafe

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Problem 3-7
QED ELECTRONICS COMPANY
Income Statement for the month of April, ----.|
Sales| | $33,400|
Expenses:| | |
Bad debts| $ 645| |
Parts| 3,700| |
Interest| 880| |
Wages| 10,000| |
Utilities| 800| |
Depreciation| 2,700| |
Selling| 1,900| |
Administrative| 4,700| ______ |
Profit before taxes| | 25,325|
Taxes| | 8,075|
Net income| | $5,275.|

Truck purchase has no income statement effect. It is an asset. Sales are recorded as earned, not when cash is received. Bad debt provision of 5 percent related to sales on credit ($33,400 - $20,500) must be recognized. Wages expense is recognized as incurred, not when paid. March’s utility bill is an expense of March when the obligation was incurred. Income tax provision relates to pretax income. Must be matched with related income.

Case 3-2: Lone Pine Café (B)
Note: This case is unchanged fro the Tenth Edition.
Approach
This case introduces students to preparation of an income statement based on analyzing transactions. At this stage, students are not expected to set up accounts in the formal sense. However, in effect they do so for those income statement items that did not coincide exactly with cash flows.

Question 1
A suggested income statement as required by Question 1 is shown below. The following notes apply to the income statement. 1. The student needs to refer back to Lone Pine Café (A) in order to construct the income statement on the accrual basis. Amounts for sales on credit, purchases on credit, beginning and ending inventory, beginning and ending prepaid operating license, and depreciation expense are to be found there. Specifically: a. Sales revenues = $43,480 cash sales + $870 credit sales to ski instructors = $44,350. b. Food and beverage expense = $2,800 beginning inventory + $10,016 cash purchases + $1,583 credit purchases - $2,430 ending inventory =...
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