Chapter 2, Problem 2.12P

Cash versus accrual accounting

• LO2–8

Zambrano Wholesale Corporation maintains its records on a cash basis. At the end of each year the company’s accountant obtains the necessary information to prepare accrual basis financial statements. The following cash flows occurred during the year ended December 31, 2018:

Cash receipts:
From customers	$675,000
Interest on note	4,000
Loan from a local bank	100,000
Total cash receipts	$779,000
Cash disbursements:
Purchase of merchandise	$390,000
Annual insurance payment	6,000
Payment of salaries and wages	210,000
Dividends paid to shareholders	10,000
Annual rent payment	24,000
Total cash disbursements	$640,000

Selected balance sheet information:

	12/31/17	12/31/18
Cash	$ 25,000	$164,000
Accounts receivable	62,000	92,000
Inventory	80,000	62,000
Prepaid insurance	2,500	?
Prepaid rent	11,000	?
Interest receivable	3,000	?
Note receivable	50,000	50,000
Equipment	100,000	100,000
Accumulated depreciation—equipment	(40,000)	(50,000)
Accounts payable (for merchandise)	110,000	122,000
Salaries and wages payable	20,000	24,000
Note payable	–0–	100,000
Interest payable	–0–	?

Additional information:

1. On March 31, 2017, Zambrano lent a customer $50,000. Interest at 8% is payable annually on each March 31. Principal is due in 2021.

2. The annual insurance payment is paid in advance on April 30. The policy period begins on May 1.

3. On October 31, 2018, Zambrano borrowed $100,000 from a local bank. Principal and interest at 6% are due on October 31, 2019.

4. Annual rent on the company’s facilities is paid in advance on June 30. The rental period begins on July 1.

Required:

1. Prepare an accrual basis income statement for 2018 (ignore income taxes).

2. Determine the following balance sheet amounts on December 31, 2018:

a. Prepaid insurance

b. Prepaid rent

c. Interest receivable

d. Interest payable