XYZ Company began operations on January 1, 2027 by selling
common stock to owners in exchange for $90,000 cash. During
2027, XYZ Company entered into the following transactions:

1. On January 1, XYZ Company purchased a piece of equipment
for $40,000 cash. The equipment had a 6-year life and a
$7,000 residual value.

2. On May 1, XYZ Company purchased a three-year insurance
policy for $18,000 cash.

3. On April 23, XYZ Company purchased inventory for $30,000
cash.

4. On September 30, a customer paid XYZ Company $70,000 cash
for services to be performed over the next 20 months.

5. On November 1, XYZ Company sold one-half of the inventory
that was purchased on April 23 for $64,000 cash.

Calculate the amount of net income reported by XYZ Company in
its 2027 income statement after all the above transactions have
been recorded and all of the necessary adjusting entries have
been made.

Question

XYZ Company began operations on January 1, 2027 by selling
common stock to owners in exchange for $90,000 cash. During
2027, XYZ Company entered into the following transactions:

1.  On January 1, XYZ Company purchased a piece of equipment
    for $40,000 cash. The equipment had a 6-year life and a
    $7,000 residual value.

2.  On May 1, XYZ Company purchased a three-year insurance
    policy for $18,000 cash.

3.  On April 23, XYZ Company purchased inventory for $30,000
    cash.

4.  On September 30, a customer paid XYZ Company $70,000 cash
    for services to be performed over the next 20 months.

5.  On November 1, XYZ Company sold one-half of the inventory
    that was purchased on April 23 for $64,000 cash.

Calculate the amount of net income reported by XYZ Company in
its 2027 income statement after all the above transactions have
been recorded and all of the necessary adjusting entries have
been made.

BlackTom AI · Accepted Answer

Revenue is recognized when earned and expenses are matched to the period; applying revenue recognition, matching, and straight-line depreciation gives the 2027 net income.

1) Relevant concepts
- Revenue recognition: recognize only the portion of prepaid/unearned receipts that is earned during 2027.
- Matching principle: recognize insurance and depreciation expense for the portion of the asset/service used in 2027.
- Straight-line depreciation: (cost − residual value) / useful life.

2) Step-by-step reasoning and calculations
- Sales revenue (inventory sale on Nov 1): cash sale = 64,000.
  - Cost of goods sold (COGS): one-half of inventory purchased for 30,000 → cost sold = 30,000 × 1/2 = 15,000.
  - Gross profit from sale = 64,000 − 15,000 = 49,000 (used conceptually; COGS goes to expenses).

- Service revenue from unearned receipt (Sep 30 receipt of 70,000 for 20 months):
  - Monthly revenue = 70,000 / 20 = 3,500 per month.
  - Months of service performed in 2027: Oct, Nov, Dec = 3 months.
  - Revenue recognized in 2027 = 3,500 × 3 = 10,500.

- Insurance expense (May 1 purchase of 3-year policy for 18,000):
  - Monthly insurance = 18,000 / 36 months = 500 per month.
  - Months in 2027 covered: May–Dec = 8 months.
  - Insurance expense recognized in 2027 = 500 × 8 = 4,000.

- Depreciation expense (equipment purchased Jan 1 for 40,000, residual 7,000, life 6 years):
  - Depreciable base = 40,000 − 7,000 = 33,000.
  - Annual depreciation = 33,000 / 6 = 5,500 (full year in 2027).

3) Aggregate revenues and expenses
- Total revenues = 64,000 (sales) + 10,500 (service revenue) = 74,500.
- Total expenses = 15,000 (COGS) + 4,000 (insurance) + 5,500 (depreciation) = 24,500.

4) Net income calculation
- Net income = 74,500 − 24,500 = 50,000.

5) Why other treatments would be incorrect
- Treating the entire 70,000 as 2027 revenue overstates revenue (only 3 months earned).
- Expensing full 18,000 insurance or ignoring depreciation would misstate expenses and net income.
- Not recognizing COGS for the sold inventory would overstate profit.

6) Conclusion
The correct 2027 net income is $50,000, which matches the provided answer.

Similar Questions

Use the same information as in Question 6. The sales manager is convinced that a $5,400 increase in the monthly advertising budget would increase total sales by $18,000. What would be the effect on net operating income?

You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?

Assume the price of a product is $20, and the table below shows total costs for various levels of output. [table] Quantity | 0 | 1 | 2 | 3 | 4 | 5 | 6 Total Costs | $15 | $20 | $22 | $28 | $37 | $58 | $105 [/table] What is the profit when output is 1? (Do not use the dollar sign in your answer)

So far, how many in-class activities have you completed? 16 or more

From the list below, the best definition of the term 'excise tax' is

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler