Revenue and Expense Recognition and Closing Entries

Two years ago Darlene Darby opened a delivery service. Darby reports the following accounts on

her income statement:

These amounts represent two years of revenue and expenses. Darby asks you how she can tell

how much of the income is from the first year of business and how much is from the second year.

She provides the following additional data:

a. Sales in the second year are double those of the first year.

b. Advertising expense is for a $500 opening promotion and weekly ads in the newspaper.

c. Salaries represent one employee for the first nine months and two employees for the remainder

of the time. Each is paid the same salary. No raises have been granted.

d. Rent has not changed since the business opened.

Required

1. Prepare income statements for Years 1 and 2.

2. Prepare the closing entries for each year. Prepare a short explanation for Darby about the purpose

of closing temporary accounts.