Revenue and Expense Recognition and Closing Entries
Two years ago, Sue Stern opened an audio book rental shop. Sue reports the following accounts on her income statement:
|
Sales
|
$84,000
|
|
Advertising Expense
|
10,500
|
|
Salaries Expense
|
12,000
|
|
Depreciation on CDs
|
5,000
|
|
Rent Expense
|
18,000
|
These amounts represent two years of revenue and expenses. Sue asks you how she can tell how much of the income is from the first year and how much is from the second year of business. She provides the following additional data:
a. Sales in the second year are triple those of the first year.
b. Advertising expense is for a $1,500 opening promotion and weekly ads in the newspaper.
c. Salaries represent one employee who was hired eight months ago. No raises have been granted.
d. Rent has not changed since the shop opened.
Required
1. Prepare income statements for Years 1 and 2.
2. Prepare the closing entries for each year. Prepare a short explanation for Sue about the pur- pose of closing temporary accounts.