Question

Your friend, Dean McChesney, requested that you advise him on the effects that certain transactions will have on his business, A-Plus Travel Planners. Time is short, so you cannot journalize the transactions. Instead, you must analyze the transactions without a journal. McChesney will continue the business only if he can expect to earn a monthly net income of \(6,000. The business completed the following transactions during June:

a. McChesney deposited \)10,000 cash in a business bank account to start the company. The company issued common stock to McChesney.

b. Paid \(300 cash for office supplies.

c. Incurred advertising expense on account, \)700.

d. Paid the following cash expenses: administrative assistant’s salary, \(1,400; office rent, \)1,000.

e. Earned service revenue on account, \(8,800.

f. Collected cash from customers on account, \)1,200.

Requirements

4. Compute the amount of net income or net loss for this first month of operations. Would you recommend that McChesney continue in business?

Short answer

The net income is $5,700 and it is not recommended to carry out the business.

Step-by-step solution

Computation of Net Income

$$\begin{gathered} \mathbf{NetIncome}\mathbf{=}\mathbf{Revenue}\mathbf{-}\mathbf{Expenses} \\ \mathbf{=}\mathbf{8}\mathbf{,}\mathbf{800}\mathbf{-}\mathbf{1}\mathbf{,}\mathbf{400}\mathbf{-}\mathbf{1}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{700} \\ \mathbf{=}\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{700} \end{gathered}$$

Recommendation to McChesney

The business's net income is $5,700, and McChesney expected a net income of $6,000. So, it is recommended not to carry out this business.