P3-67B. (Learning Objective 1: Explain how accrual accounting differs from cash-
ID: 2611890 • Letter: P
Question
P3-67B. (Learning Objective 1: Explain how accrual accounting differs from cash-basis accounting) Whittaker Consulting had the following selected transactions in July: LO July 1 4 Prepaid insurance for July through September, $750 Purchased office furniture for cash, $3,500 Performed services and received cash, $1,200. Paid advertising expense, $200. Performed service on account, $3,300. Purchased computer on account, $2,500. Collected for July 11 service. Paid account payable from July 19 Paid salary expense, $1,500 Adjusted for July insurance expense (see July 1) Earned revenue of $400 that was collected in advance back in June Recorded July depreciation expense on all fixed assets, $260. 19 24 26 29 31 31 31 Requirements 1. Show how each transaction would be handled (in terms of recognizing revenues and expenses) using the cash basis and the accrual basis. 2. Compute July income (loss) before tax under each accounting method. 3. Indicate which measure of net income or net loss is preferable. Use the transactions on July 11 and July 24 to explainExplanation / Answer
1) Please find the below entries to know how transactions will be treated under both the systems
Cash basis
Accrual basis
Account receivable
Service revenue
3300
Computer
Accounts payable
2500
2500
Insurance expense
Prepaid insurance expense
250
250
Advance received towards revenue
Service revenue
400
400
2) Income/(loss) before tax under each method
Cash basis
= Service revenue - All expenses
= 1200 + 3300 - (750+200+1500+260)
= $ 1790
Accrual basis
= Service revenue - All expenses
= 1200 + 3300 + 400 - (200+1500+250+260)
= $ 2690
c) The accrual basis of accounting provides a better picture of a company's profits.
The reason is that the income statement prepared under the accrual basis will report all of the revenues actually earned during the period and all of the expenses incurred in order to earn the revenues and not all the expenses which is paid in cash.
Date Account Debit Credit July 1 Insurance expense 750 Cash 750 4 Furniture 3500 Cash 3500 5 Cash 1200 Service revenue 1200 8 Advertisement expenses 200 Cash 200 11 No Entry 19 No entry 24 Cash 3300 Service revenue 3300 26 Computer 2500 Cash 2500 29 Salary Expense 1500 Cash 1500 31 No entry 31 No entry 31 Depreciation expense 260 Fixed assets 260Related Questions
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