Mr. Pitt has relented and agrees to provide you with the information necessary to converthis cash basis financial statements to accrual basis statements. He provides you with the following transactioninformation for the fiscal year ending December 31, 2018:1. A new comprehensive insurance policy requires an annual payment of $12,000 for the upcoming year. Coverage began on September 1, 2018, at which time the first payment was made.2. Mr. Pitt allows customers to pay using a credit card. At the end of the current year, various credit card companies owed Mr. Pitt $6,500. At the end of last year, customer credit card charges outstanding were $5,000.3. Employees are paid once a month, on the 10th of the month following the work period. Cash disbursementsto employees were $8,200 and $7,200 for January 10, 2019, and January 10, 2018, respectively.4. Utility bills outstanding totaled $1,200 at the end of 2018 and $900 at the end of 2017.5. A physical count of inventory is always taken at the end of the fiscal year. The merchandise on hand at theend of 2018 cost $35,000. At the end of 2017, inventory on hand cost $32,000.6. At the end of 2017, Mr. Pitt did not have any bills outstanding to suppliers of merchandise. However, at theend of 2018, he owed suppliers $4,000.Required:1. Mr. Pitt’s 2018 cash basis net income (including depreciation expense) is $26,000. Determine net incomeapplying the accrual accounting model.2. Explain the effect on Mr. Pitt’s balance sheet of converting from cash to accrual. That is, would assets, liabilities, and owner’s equity be higher or lower and by what amounts?
Mr. Pitt has relented and agrees to provide you with the information necessary to convert
his cash basis financial statements to accrual basis statements. He provides you with the following transaction
information for the fiscal year ending December 31, 2018:
1. A new comprehensive insurance policy requires an annual payment of $12,000 for the upcoming year. Coverage began on September 1, 2018, at which time the first payment was made.
2. Mr. Pitt allows customers to pay using a credit card. At the end of the current year, various credit card companies owed Mr. Pitt $6,500. At the end of last year, customer credit card charges outstanding were $5,000.
3. Employees are paid once a month, on the 10th of the month following the work period. Cash disbursements
to employees were $8,200 and $7,200 for January 10, 2019, and January 10, 2018, respectively.
4. Utility bills outstanding totaled $1,200 at the end of 2018 and $900 at the end of 2017.
5. A physical count of inventory is always taken at the end of the fiscal year. The merchandise on hand at the
end of 2018 cost $35,000. At the end of 2017, inventory on hand cost $32,000.
6. At the end of 2017, Mr. Pitt did not have any bills outstanding to suppliers of merchandise. However, at the
end of 2018, he owed suppliers $4,000.
Required:
1. Mr. Pitt’s 2018 cash basis net income (including
applying the accrual accounting model.
2. Explain the effect on Mr. Pitt’s balance sheet of converting from cash to accrual. That is, would assets, liabilities, and owner’s equity be higher or lower and by what amounts?
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