The Fly Right Travel Agency was organized on January 1, 2010, by Joe Kirkpatrick. Joe is a good manager but a poor accountant. From the trial balance prepared by a parttime bookkeeper, Joe prepared the following income statement for the quarter that ended March 31, 2012.

Joe knew that something was wrong with the statement because net income had never exceeded $8,000 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, 2012.

Supplies ..........$ 2,900
Prepaid insurance .......3,360
Notes payable ........12,000

You then make inquiries and discover the following:

1. Travel service revenue includes advance payments for cruises, $20,000.
2. There were $800 of supplies on hand at March 31.
3. Prepaid insurance resulted from the payment of a one-year policy on January 1, 2012.
4. The mail on April 1, 2012, brought the utility bill for the month of March's heat, light, and power, $210.
5. There are two employees who receive salaries of $80 each per day. At March 31, four days' salaries have been incurred but not paid.
6. The note payable is a 6-month, 7% note dated January 1, 2012.

Instructions

(a) Prepare any adjusting journal entries required at March 31, 2012.
(b) Prepare a correct income statement for the quarter ended March 31, 2012.
(c) Explain to Joe the generally accepted accounting principles that he did not recognize in preparing his income statement and their effect on his results.