P3-11 (L07) (Cash and Accrual Basis) On January 1, 2017, Norma Smith and Grant W
ID: 2339171 • Letter: P
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P3-11 (L07) (Cash and Accrual Basis) On January 1, 2017, Norma Smith and Grant Wood formed a computer sales and service company in Soapsville, Arkansas, by investing $90,000 cash. The new company, Arkansas Sales and Service, has the fol- lowing transactions during January 1. Pays $6,000 in advance for 3 months' rent of office, showroom, and repair space. 2. Purchases 40 personal computers at a cost of $1,500 ach,6 graphics computers at a cost of $2,500 each, and 25 printers at a cost of $300 each, paying cash upon deliveryExplanation / Answer
(a) Income Statement
Sales*
Personal computers 2550*30 76,500
Graphic Computer 3600*4 14,400
Printers 500*15 7,500
98,400
Purchases & Paid**
Personal Computers 1500*40 60,000
Graphic Computer 2500*6 15,000
Printers 300*25 7,500
82,500
Cost of goods sold***
Personal computers 1500*30 45,000
Graphic Computer 2500*4 10,000
Printers 300*15 4,500
59,500
(b) Balance Sheet
(c) $23,400 in receivables from customers is an asset and a future cash flow resulting from sales is ignored. The cash basis understates the amount of revenues and inflow of assets in january from the sale of computers and printers by $23,400
$23,000 in inventory is an asset and cash basis overstates the purchase amount and understates the inventory amount.
$4,000 Rent paid in advance is an asset and future benefits of rent paid in advance is ignored. The cash basis understates the $4000 asset and overstates the Rent expenses.
$3000 salary that is not paid will be shown as liability but cash basis understates the liability and also udnerstates the expense
$2000 for Operating expense is understated in accounts payable and also the expenses are understated by $2000 in cash basis accounting.
Cash Basis Accrual Basis Sales* 75,000 98,400 Less:Expenses Purchases & Paid** 82,500 Cost of goods sold*** 59,500 Rent paid 6,000 2,000 Salary Expense 9,600 12,600 Operating expense 8,400 10,400 Total expense 106,500 84,500 Net Income/Loss -31,500 13,900Related Questions
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