The Fly Right Travel Agency was organized on January 1, 2005, by Sam Cheney. — prepare adjusting entries Sam is a good manager but a poor accountant. From the trial balance prepared bya part- and a corrected income time bookkeeper, Sam prepared the income statement on page 208 for the quarter that — statement.

ended March 31, 2007. (SO 4, 5)

208 CHAPTER 4 Accrual Accounting Concepts

(b) Net income $5,815 Journalize transactions and follow through accounting cycle to preparation of financial statements.

(SO 4, 5, 6)

IGLS FLY RIGHT TRAVEL AGENCY Income Statement For the Quarter Ended March 31, 2007 Revenues Travel service revenue $50,000 Operating expenses Advertising $2,600 Depreciation 400 Income tax 1,500 Salaries 6,000 Utilities 400 10,900 Net income $39,100 Sam knew that something was wrong with the statement because net income had never exceeded $5,000 in any one quarter. Knowing that you are an experienced accountant, he asks you to review the income statement and other data.

You first look at the trial balance. In addition to the account balances reported above in the income statement, the trial balance contains the following additional selected balances at March 31, 2007.

Supplies $ 2,900 Prepaid insurance 1,200 Note payable 10,000 You then make inquiries and discover the following: 1. Travel service revenue includes advance payments for cruises, $30,000. 2. There were $800 of supplies on hand at March 31. 3. Prepaid insurance resulted from the payment of a one-year policy on March 1, 2007.

4 . The mail on April 1, 2007, brought the utility bill for the month of March's heat, light, and power, $210. 5. There are three employees who receive salaries of $75 each per day. At March 31, three days’ salaries have been incurred but not paid. 6. The note payable is a 6-month, 8% note dated January 1, 2007.

Instructions

(a) Prepare any adjusting journal entries required as at March 31, 2007.

(b) Prepare a correct income statement for the quarter ended March 31, 2007.

(c) Explain to Sam the generally accepted accounting principles that he did not recognize in preparing his income statement and their effect on his results.