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01-02 Explain the difference between cash and accrual accounting.

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Score:
22/22
Points
100
%
3.
Award: 4 out of 4.00 points
Listed below are several transactions that took place during the second and third years of operations for RPG Company.
Year 2
Year 3
$ 350,000 $ 450,000
260,000
400,000
Amounts billed to customers for services rendered
Cash collected from credit customers
Cash disbursements:
Payment of rent
Salaries paid to employees for services rendered during the year
Travel and entertainment
Advertising
80,000
140,000
30,000
15,000
0
160,000
40,000
35,000
In addition, you learn that the company incurred advertising costs of $25,000 in year 2, owed the advertising agency $5,000 at the end of
year 1, and there were no liabilities at the end of year 3. Also, there were no anticipated bad debts on receivables, and the rent payment
was for a two-year period, year 2 and year 3.
Required:
1. Calculate accrual net income for both years.
2. Determine the amount due the advertising agency that would be shown as a liability on RPG’s balance sheet at the end of year 2.
Complete this question by entering your answers in the tabs below.
Required 1
Required 2
Calculate accrual net income for both years.
Year 2
Revenues
$
Year 3
350,000

$
450,000

Expenses:
40,000

40,000

Salaries
140,000

160,000

Travel and
entertainment
Advertising
30,000

40,000

25,000

115,000

Rent
Net income
$
20,000

$
190,000


Required 1
Required 2

Hints
Hint #1
References
Worksheet
Difficulty: 2 Medium
Learning Objective: 01-02 Explain the difference between
cash and accrual accounting.
Listed below are several transactions that took place during the second and third years of operations for RPG Company.
Amounts billed to customers for services rendered
Cash collected from credit customers
Cash disbursements:
Payment of rent
Salaries paid to employees for services rendered during the year
Travel and entertainment
Year 2
Year 3
$ 350,000 $ 450,000
260,000
400,000
80,000
140,000
30,000
0
160,000
40,000
Advertising
15,000
35,000
In addition, you learn that the company incurred advertising costs of $25,000 in year 2, owed the advertising agency $5,000 at the end
of year 1, and there were no liabilities at the end of year 3. Also, there were no anticipated bad debts on receivables, and the rent
payment was for a two-year period, year 2 and year 3.
Required:
1. Calculate accrual net income for both years.
2. Determine the amount due the advertising agency that would be shown as a liability on RPG’s balance sheet at the end of year 2.
Complete this question by entering your answers in the tabs below.
Required 1
Required 2
Determine the amount due the advertising agency that would be shown as a liability on RPG’s balance sheet at the end of
year 2.
Advertising liability at end of Year 2
$
15,000

Required 1
Required 2
Explanation:
1.
Rent = ($80,000 ÷ 2) = ($40,000)
2.
Amount owed at the end of year one
Advertising costs incurred in year two
Amount paid in year two
Liability at the end of year two
Less cash paid in year three
Advertising expense in year three
$ 5,000
25,000
30,000
(15,000)
15,000
(35,000)
$ 20,000

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