Knoll Company began operations on January 1, 2012, by issuing common stock for $94,000 cash. During 2012, Knoll received $77,000 cash from revenue and incurred costs that required $90,000 of cash payments.

Required

Prepare an income statement and a balance sheet for Knoll Company for 2012, under each of the following independent scenarios.

a. Knoll is an employment agency. The $90,000 was paid for employee salaries and advertising.

b. Knoll is a trucking company. The $90,000 was paid to purchase two trucks. The trucks were purchased on January 1, 2012, had five-year useful lives and no expected salvage value. Knoll uses straight-line depreciation.

c. Knoll is a manufacturing company. The $90,000 was paid to purchase the following items:

(1) Paid $18,000 cash to purchase materials used to make products during the year.

(2) Paid $28,000 cash for wages to production workers who make products during the year.

(3) Paid $4,000 cash for salaries of sales and administrative employees.

(4) Paid $40,000 cash to purchase manufacturing equipment. The equipment was used solely for the purpose of making products. It had a six-year life and a $4,000 salvage value. The company uses straight-line depreciation.

(5) During 2012, Knoll started and completed 2,600 units of product. The revenue was earned when Knoll sold 2,200 units of product to its customers.

d. Refer to Requirement c. Could Knoll determine the actual cost of making the 500th unit of product? How likely is it that the actual cost of the 500th unit of product was exactly the same as the cost of producing the 501st unit of product? Explain why management may be more interested in average cost than in actual cost.