M3-1 Reporting Cash Basis versus Accrual Basis Income
Mostert Music Company had the following transactions in March:
a. Sold music lessons to customers for $10,000; received $6,000 in cash and the rest on account.
b. Paid $600 in wages for the month.
c. Received a $200 bill for utilities that will be paid in April.
d. Received $1,000 from customers as deposits on music lessons to be given in April.
Complete the following statements for March:
Cash Basis Income Statement Accural Basis Income Statement
Cash Sales $ Sales to Customers $
Wages Paid Wages Expenses
Cash Income $ Net Income $
For each of the transactions, if revenue is to be recognized in September, indicate the amount. If revenue is not to be recognized in September, Explain why?.
E3-3 Identifying Accrual Basis Revenues
According to the revenue principle, revenues should be recognized when they are earned, which happens when the company performs acts promised to the customer. For most businesses, this condition is met at the point of delivery of goods or services. The following transactions occured in September 2010.
a. Gillespie Enterprises Inc. Issues $26 million in new common stock.
b. Cal State University receives $20,000,00 cash for 80,000 five-game season football tickets. None of the games have been played.
c. Cal State plays the first football game referred to in (b).
d. Hall Construction Company signed a contract with a customer for the construction of a new $500,000 warehouse. At the signing, Hall receives a check for $50,000 as a deposit to be applied against amounts earned during the first phase of construction. Answer from Hall’s standpoint.
e. A popular snowboarding magazine company receives a total of $1,800 today from subscribers. The subscriptions begin in the next fiscal year. Answer from the magazine company’s standpoint.
f. T-Mobile sells a $100 cell phone plan for service in September to a customer who charges the sale on his credit card. Answer from the standpoint of T-Mobile.
For each of the transactions, if revenue is to recognized in September, indicate the amount. If revenue is not to be recognized in September, Explain Why?.
Under accrual basis accounting, expenses are recognized when incurred, which means the activity giving rise to the expenses has occurred. Assume the following transactions occurred in January 2010:
a. Gateaway pays its computer service technicians $90,000 in salary for work done in January 2010. Answer from Gateway’s standpoint.
b. At the beginning of January, Turner Construction Company pays $4,500 in rent for February-April 2010.
c. The McGraw-Hill Companies- publisher of this textbook and BusinessWeek- uses $1,000 worth of electricity and natural gas in January for which it has not yet been billed.
d. Pooler Company receives and pays in January a $1,500 invoice from a consulting firm for services received in January.
e. The campus bookstore receives consulting services at a cost of $5,000. The terms indicate that payment is due within 30 days of the consultation.
f. Schergevitch Incorporated has its delivery van repaired in January for $280 and charges the amount on account.
For each of the transactions, if an expense is to be recognized in January, indicate the amount. If an expense is not to be recognized in January, Indicate Why.?
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