Kettle Corporation was formed during 1998 by Pam Bollinger. Pam is the president and sole stockholder. At December 31, 1999, Pam prepared an income statement for Kettle Corporation. Pam is not an accountant, but she thinks she did a reasonable job preparing the income statement by looking at the financial statements of other companies. She has asked you for advice. Pam's income statement appears as follows:

Pam has also provided you with these facts:
1. Included in the revenue account is \(\$ 5,000\) of revenue that the company earned and received payment for in 1998. She forgot to include it in the 1998 income statement, so she put it in this year's statement.
2. Pam operates her business out of the basement of her parents' home. They do not charge her anything, but she thinks that if she paid rent it would cost her about \(\$ 20,000\) per year. She therefore included \(\$ 20,000\) of rent expense in the statement.
3. To reward herself for a year of hard work, Pam went to Hawaii. She did not use company funds to pay for the trip, but she reported it as an expense on the income statement, since it was her job that made her need the vacation.

\section*{Instructions}

(a) Comment on the proper accounting treatment of the three items above.

(b) Prepare a corrected income statement for Kettle Corporation.

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KETTLE CORPORATION Income Statement For the Year Ended December 31, 1999 Accounts receivable $10,000 Revenue 60,000 Rent expense 20,000 Insurance expense 3,000 Vacation expense 2,000 Net income 45,000