Analyze accounting methods and prepare corrected income statement. (LO 1, 2, 4) You are the accountant for Celebration Company, and your assistant has prepared the following income statement for the year ended December 31, 2006.

You have uncovered the following facts:
1. Sales revenue includes \(\$ 6,000\) of items that have been back-ordered. (The items have not been delivered to the customers, although the customers have paid for the items.)
2. Selling expenses includes \(\$ 4,000\) of allowances that were given to customers who received damaged products.
3. Rent expense includes \(\$ 400\) worth of rent that applies to 2011 .
4. Salary expenses include \(\$ 10,000\) loaned to one of the executives for a boat.

a. Prepare a corrected multistep income statement for the year. Celebration shows sales as the net amount only on its income statement.

b. Write a memo to your assistant explaining why each error you found is incorrect and what the correct accounting treatment should be.

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Sales revenue Celebration Company Income Statement For the year ended December 31, 2010 $650,000 Sales returns and allowances $18,100 Freight expenses 2,000 Selling expenses 48,300 (68,400) Net sales 581,600 Expenses Cost of goods sold 350,000 Salary expenses 82,000 Rent expense 10,000 Administrative expenses 23,500 Dividends 4,000 Total expenses Net income 469,500 $112,100