Simple and Basic Presented below are account balances as of 12/31/2015 or for th

Question

Simple and Basic

Presented below are account balances as of 12/31/2015 or for the year 2015 for the Basic Company: Prop, Plant, & Equip.

$20,000

Depreciation Expense

$600

Research and Development Expense

$900

Utilities Expense

$300

Accumulated Depreciation

$3,500

Service Revenue

$8,000

Salary Payable

$900

Salary Expense

$1,100

Cash

$2,300

Prepare an income statement for the Basic Company using only those items above that belong in the income statement.

Upon review by the accounting department, it turns out that the $900 spent for "Research and Development" was actually used to purchase a machine in 2015 that they received, but won’t start using until mid-2016. (7 points)

How (and how much) would this new information change the 2015 income statement?

How (and how much) would this new information change the 12/31/2015 balance sheet?

Would your answer related to the change to the income statement change if it turns out that they also have not yet paid the $900 bill for the machine?

Presented below are account balances as of 12/31/2015 or for the year 2015 for the Basic Company: Prop, Plant, & Equip.

$20,000

Depreciation Expense

$600

Research and Development Expense

$900

Utilities Expense

$300

Accumulated Depreciation

$3,500

Service Revenue

$8,000

Salary Payable

$900

Salary Expense

$1,100

Cash

$2,300

Explanation / Answer

INCOME STATEMENT:

REVENUE:

Service Revenue =$8000

Total Revenue =$8000

EXPENSES:

Utilities expense =$300

Depreciation Expense =$600

Salary Expense =$1100

Research & Development exp =$900

Total Expenses =$2900

Income=Revenue-Expenses =8000-2900

   =$5100

1) If the amount of $900 was spent towards the purchase of machinery,then the amount will be capitalised and will be shown in Income statement.It will be depreciated over the useful life of the machinery.

Effect on Income statement: Since expenses get reduced by $900,(because research & development exp will not be shown in income statement)income will increase by $900.New income will be $5100+$900=$6000

2) In the Balance Sheet this expense of $900 will be added to the cost of machinery & will be depreciated over the useful life of asset.Depreciation is charged from the date the asset is ready to use and not from the date it is actually put to use.

3) Even if they have not paid the bill amount for the purchase of the machinery,they have received the possession of the machinery and machinery is ready for use.So,the answer will remain the same.

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