Question

Before income taxes, what amount should Lee include in its year 1 income statement as a result of the investment?

Answer 1

Before income taxes, Lee's year 1 income statement should include the net profit, which is the sales revenue minus cumulative expenses, totaling $50,000.

Step-by-step explanation:

Before income taxes, Lee should include in its year 1 income statement the net amount gained from the investment after deducting any associated expenses. To provide a concrete example, if Lee's firm had earned sales revenue of $1 million and had expenses totaling $950,000 for labor, capital, and materials, the firm's accounting profit would be the revenue minus the cumulative expenses.

To calculate the accounting profit:

1. Sum up all the expenses: $600,000 (labor) + $150,000 (capital) + $200,000 (materials) = $950,000 total expenses.
2. Subtract the total expenses from the sales revenue: $1,000,000 - $950,000 = $50,000 accounting profit.

The number $50,000 represents the firm's profit before income taxes, which would be included in the income statement.