Exercise 4.2 Cash versus Accrual basis of Accounting At the end of the first yea
ID: 2516675 • Letter: E
Question
Exercise 4.2 Cash versus Accrual basis of Accounting At the end of the first year of operations, Arch Etec, owner of Architect Designs, engaged you to prepare yearly financial statements for the year ended 30 June 2019, on both the cash basis and the accrual basis. The following data are a summary of selected transactions that occurred during the year. (Ignore GST.) 1. Fees of $125 000 were collected for services provided during the year. 2. There were $8000 in receivables at 30 June 2019 for services performed on credit. 3. Cash payments of S106 000 were made for salaries, rent, insurance and other expenses incurred during the year 4. Salaries owing but not yet paid amount to $4000. 5. On 15 June 2019, a client paid $3000 in advance for services to be rendered during the next financial year 6. Expenses of $6000 were prepaid (not included in the $106 000) at 30 June. Required (a) Calculate profit under both the cash basis and the accrual basis (b) Indicate how the following items would be reported in the business's balance sheet under the accrual basis: (i) the $8000 receivables (i) the unpaid salaries of $4000 (iii) the $3000 advance received on 15 June (iv) the cash payment of $6000 for prepaid expensesExplanation / Answer
a) Calculation of profit Cash basis $ Accrual basis $
Cash income 125000 125000
Revenue earned but not yet recd 8000
Revenue recd in advance 3000
Total income 128000 133000
Less expenses
Salaries, rent etc. 106000 106000
Salaries owed but not yet paid. 4000
Expenses prepaid but not yet incurred. 6000
Total expenses. 112000 110000
Profit 14000 23000
b)
1. Accounts receivable $8000 = current asset
2. Salaries payable $4000 = current liability
3.unearned fees $3000 = current liability
4. Prepaid expenses $6000 = current asset.
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