I need help with how they got the answers below, thanks. Reed & Company keeps th
ID: 2336755 • Letter: I
Question
I need help with how they got the answers below, thanks.
Reed & Company keeps their accounting records on the cash basis, but converts to the accrual basis to prepare annual financial statements. During the year, Reed’s clients paid them $260,000 and Reed paid $85,000 to cover operating expenses. Reed’s account balances as of January 1 are given below, as are the correct (accrual) December 31 balances.
January 1, 2017
December 31, 2017
Accounts Receivable
$14,000
$42,000
Prepaid Expenses
$28,000
$31,000
Accumulated Depreciation
$48,000
$64,000
Accrued Liabilities
$54,000
$46,000
Unearned Service Revenue
$70,000
$65,000
No depreciable assets were purchased or sold during 2017.
Compute (a) service revenue and (b) operating expenses on the accrual basis.
(a)
Service Revenue
$293,000
(b)
Operating Expenses
$90,000
January 1, 2017
December 31, 2017
Accounts Receivable
$14,000
$42,000
Prepaid Expenses
$28,000
$31,000
Accumulated Depreciation
$48,000
$64,000
Accrued Liabilities
$54,000
$46,000
Unearned Service Revenue
$70,000
$65,000
Explanation / Answer
Ans:
Under Accrual basis Revenue and expenses Recorded as and when they incurred not on the basis of Receipt, payment
Accounts receivable closeing is current year Revenue
Accounts receivable begening is last year Revenue
Un earned service revenue beginning is current year Revenue
Un earned service revenue closeing is Next year Revenue
Depreciation to be recorded 64000-48000=16,000 as opareting expense
Prepaid expense opening is current year expense
Prepaid expense closeing is next year expense
Accrued liabilities opening last year Expense
Accrued liabilities closeing current year expense
a) service Revenue
2,60,000+42,000-14,000+70,000-65,000=2,93,000$
b) opareting expense
85,000+28,000-31,000+46,000-54,000+16,000=90,000$
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