(Learning Objective 1: Explain how accrual accounting differs from cash-basis accounting)âHough Consulting had the following selected transactions in July:
July 1 Prepaid insurance for July through September, $4,200.
2 Purchased office furniture for cash, $5,000.
3 Performed consulting services for a client on account, $3,500.
5 Paid advertising expense, $500.
10 Performed consulting services and received cash, $1,500.
20 Purchased a computer on account, $2,500.
25 Collected for July 3 service.
26 Paid account payable from July 20.
29 Paid salary expense, $1,800.
31 Adjusted for July insurance expense (see July 1).
31 Earned revenue of $1,000 that was collected in advance back in June.
31 Recorded July depreciation on fixed assets, $125.
LO USING EXCEL:
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 3 and July 25 to explain.
| (Learning Objective 1: Explain how accrual accounting differs from cash-basis accounting)âHough Consulting had the following selected transactions in July: | |
July 1 Prepaid insurance for July through September, $4,200.
2 Purchased office furniture for cash, $5,000.
3 Performed consulting services for a client on account, $3,500.
5 Paid advertising expense, $500.
10 Performed consulting services and received cash, $1,500.
20 Purchased a computer on account, $2,500.
25 Collected for July 3 service.
26 Paid account payable from July 20.
29 Paid salary expense, $1,800.
31 Adjusted for July insurance expense (see July 1).
31 Earned revenue of $1,000 that was collected in advance back in June.
31 Recorded July depreciation on fixed assets, $125.
LO USING EXCEL:
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 3 and July 25 to explain.
Related questions
| (Learning Objective 1: Explain how accrual accounting differs from cash-basis accounting)âHough Consulting had the following selected transactions in July: | |
July 1 Prepaid insurance for July through September, $4,200.
2 Purchased office furniture for cash, $5,000.
3 Performed consulting services for a client on account, $3,500.
5 Paid advertising expense, $500.
10 Performed consulting services and received cash, $1,500.
20 Purchased a computer on account, $2,500.
25 Collected for July 3 service.
26 Paid account payable from July 20.
29 Paid salary expense, $1,800.
31 Adjusted for July insurance expense (see July 1).
31 Earned revenue of $1,000 that was collected in advance back in June.
31 Recorded July depreciation on fixed assets, $125.
LO USING EXCEL:
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 3 and July 25 to explain.
| Req. 1 & 2 | ||||||
| Hough Consulting | ||||||
| Amount of Revenue (Expense) for July | ||||||
| Date | Cash Basis | Accrual Basis | ||||
| July 1 | ||||||
| Income (loss) before tax | $ - | $ 0 | ||||
| Req. 3 | ||||||
At June 30, 2017, the end of its most recent fiscal year, Primrose Comp Consultantsâ post-closing trial balance was as follows:
| Debit | Credit | |||
| Cash | $5,860 | |||
| Accounts receivable | 1,340 | |||
| Supplies | 770 | |||
| Accounts payable | $450 | |||
| Unearned service revenue | 1,250 | |||
| Common stock | 4,000 | |||
| Retained earnings | 2,270 | |||
| $7,970 | $7,970 |
The company underwent a major expansion in July. New staff was hired and more financing was obtained. Culver conducted the following transactions during July 2017, and adjusts its accounts monthly.
| July | 1 | Purchased equipment, paying $4,000 cash and signing a 2-year note payable for $22,400. The equipment has a 4-year useful life. The note has a 6% interest rate which is payable on the first day of each following month. | |
| 2 | Issued 22,400 shares of common stock for $56,000 cash. | ||
| 3 | Paid $4,200 cash for a 12-month insurance policy effective July 1. | ||
| 3 | Paid the first 2 (July and August 2017) monthsâ rent for an annual lease of office space for $4,500 per month. | ||
| 6 | Paid $4,300 for supplies. | ||
| 9 | Visited client offices and agreed on the terms of a consulting project. Culver will bill the client, Connor Productions, on the 20th of each month for services performed. | ||
| 10 | Collected $1,340 cash on account from Milani Brothers. This client was billed in June when Culver performed the service. | ||
| 13 | Performed services for Fitzgerald Enterprises. This client paid $1,250 in advance last month. All services relating to this payment are now completed. | ||
| 14 | Paid $450 cash for a utility bill. This related to June utilities that were accrued at the end of June. | ||
| 16 | Met with a new client, Thunder Bay Technologies. Received $13,400 cash in advance for future services to be performed. | ||
| 18 | Paid semi-monthly salaries for $12,300. | ||
| 20 | Performed services worth $31,400 on account and billed customers. | ||
| 20 | Received a bill for $2,500 for advertising services received during July. The amount is not due until August 15. | ||
| 23 | Performed the first phase of the project for Thunder Bay Technologies. Recognized $11,200 of revenue from the cash advance received July 16. | ||
| 27 | Received $16,800 cash from customers billed on July 20. |
Adjustment data:
| 1. | Adjustment of prepaid insurance. | |
| 2. | Adjustment of prepaid rent. | |
| 3. | Supplies used, $1,400. | |
| 4. | Equipment depreciation, $550 per month. | |
| 5. | Accrual of interest on note payable. | |
| 6. | Salaries for the second half of July, $12,300, to be paid on August 1. | |
| 7. | Estimated utilities expense for July, $900 (invoice will be received in August). | |
| 8. | Income tax for July, $1,340, will be paid in August |
*Journalize July Transactions**
