Concept explainers
Analyzing the Effects of Transactions in T-Accounts and Computing Cash Basis versus Accrual Basis Net Income
At January 1 (beginning of its fiscal year). Conover. Inc., a financial services consulting firm, reported the following account balances (in thousands of dollars, except number of shares and par value per share):
Cash | $1,900 | Accounts payable | $210 |
Short-term investments | 410 | Unearned revenue | 1,320 |
3,570 | Salaries payable | 870 | |
Supplies | 150 | Short-term note payable | 780 |
Prepaid expenses | 4,720 | Common stock ($1 par value) | 50 |
Office equipment | 1,530 | Additional paid-in capital | 6,560 |
Accumulated |
(480) | 2,010 |
*This accoutu has a credit balance representing the portion of the cost of the equipment used in the past.
Required:
- 1. Create T-accounts for the balance sheet accounts and for these additional accounts: Consulting Fees Revenue. Interest Revenue. Salaries Expense, and Utilities Expense. Enter the beginning balances of the balance sheet accounts: Conover's income statement accounts had zero balances.
- 2. Enter the following transactions for the current year into the T-accounts, using the letter of each transaction as the reference:
- a. Received $9,500 cash for consulting services rendered.
- b. Issued 10,000 additional shares of common stock at a market price of $120 per share.
- c. Purchased $640 of equipment, paying 25 percent in cash and owing the rest on a short-term note.
- d. Received $890 from clients for consulting services to be performed in the next year.
- e. Bought $470 of supplies on account.
- f. Incurred and paid $1,800 in utilities for the current year.
- g. Consulted for clients in the current year for fees totaling $1,620. due from clients in the next year.
- h. Received $2,980 from clients paying on their accounts.
- i. Incurred $6,210 in salaries in the current year, paying $5,300 and owing the rest (to be paid next year).
- j. Purchased $1,230 in short-term investments and paid $800 for insurance coverage beginning in the next fiscal year.
- k. Received $10 in interest revenue earned in the current year on short-term investments.
- 3. Using the data from the T-accounts, amounts for the following at the end of the current year were
Revenues $ _________ −Expenses $ ________ = Net Income $ __________
Assets $ _______ = Liabilities $ _________ + Stockholders’ Equity $ _________
- 4 What would net income be if Conover, Inc., used the cash basis of accounting? Why does this differ from accrual basis net income (in requirement 3)?
1 and 2
Prepare the T- account and enter the transaction into their respective accounts for calculating the ending balance.
Explanation of Solution
T-account:
T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.
The components of the T-account are as follows:
a) The title of the account
b) The left or debit side
c) The right or credit side
Prepare the T-accounts:
Cash account:
Cash account | |||
Beginning balance | $1,900 | (c) | $160 |
(a) | $9,500 | (f) | $1,800 |
(b) | $1,200 | (i) | $5,300 |
(k) | $10 | (j) | $2,030 |
(d) | $890 | ||
(h) | $2,890 | ||
Ending balance | $7,190 |
Short-term investments account:
Short-term investments account | |||
Beginning balance | $410 | ||
(j) | $1,230 | ||
Ending balance | $1,640 |
Accounts receivable account:
Accounts receivable account | |||
Beginning balance | $3,570 | ||
(g) | $1,620 | (h) | $2,980 |
Ending balance | $2,210 |
Supplies account:
Supplies account | |||
Beginning balance | $150 | ||
(e) | $470 | ||
Ending balance | $620 |
Prepaid expenses account:
Prepaid expenses account | |||
Beginning balance | $4,720 | ||
(j) | $800 | ||
Ending balance | $5,520 |
Office equipment account:
Office equipment account | |||
Beginning balance | $1,530 | ||
(c) | $640 | ||
Ending balance | $2,170 |
Accumulated depreciation account:
Accumulated depreciation account | |||
Beginning balance | $480 | ||
Ending balance | $480 |
Accounts payable account:
Accounts payable account | |||
Beginning balance | $210 | ||
(e) | $470 | ||
Ending balance | $680 |
Unearned revenue account:
Unearned revenue account | |||
Beginning balance | $1,320 | ||
(d) | $890 | ||
Ending balance | $2,210 |
Salaries payable account:
Salaries payable account | |||
Beginning balance | $870 | ||
(i) | $910 | ||
Ending balance | $1,780 |
Short-term note payable account:
Short-term note payable account | |||
Beginning balance | $780 | ||
(c) | $480 | ||
Ending balance | $1,260 |
Common stock account:
Common stock account | |||
Beginning balance | $50 | ||
(b) | $10 | ||
Ending balance | $60 |
Additional paid-in capital account:
Additional paid-in capital account | |||
Beginning balance | $6,560 | ||
(b) | $1,190 | ||
Ending balance | $7,750 |
Retained earnings account:
Retained earnings account | |||
Beginning balance | $2,010 | ||
Ending balance | $2,010 |
Consulting fees revenue account:
Consulting fees revenue account | |||
Beginning balance | 0 | ||
(a) | $9,500 | ||
(g) | $1,620 | ||
Ending balance | $11,120 |
Interest revenue account:
Interest revenue account | |||
Beginning balance | 0 | ||
(k) | $10 | ||
Ending balance | $10 |
Salaries expense account:
Salaries expense account | |||
Beginning balance | 0 | ||
(i) | $6,210 | ||
Ending balance | $6,210 |
Utilities expense account:
Utilities expense account | |||
Beginning balance | 0 | ||
(f) | $1,800 | ||
Ending balance | $1,800 |
Thus, the T-accounts are prepared and the ending balances are calculated.
3.
Ascertain the amount for the given equations at the end of the January.
Answer to Problem 3.13E
For the equation
For the equation
Explanation of Solution
Accrual basis of accounting:
Accrual basis of accounting refers to recognizing the financial transactions during the period in which the event occurs, even if the cash is not exchanged.
Working note:
Calculate the revenues:
Calculate the expenses:
Calculate the net income:
Particulars | Amount($) | Amount ($) |
Revenues | (1)11,130 | |
Less: Expenses | (2)8,010 | |
Net income | $3,120 |
Table (1)
Accounting equation:
Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:
Calculate the amount for the accounting equation:
Assets | = | Liabilities | + | Stockholders’ Equity |
$7,190 | $680 | $60 | ||
$1,640 | $2,210 | $7,750 | ||
$2,210 | $1,780 | $2,010 | ||
$620 | $1,260 | $3,120 | ||
$5,520 | ||||
$2,170 | ||||
($480) | ||||
$18,870 | = | $5,930 | + | $12,940 |
Table (2)
4.
Calculate the net income under cash basis of accounting and explain the reason in which manner the net income differ from accrual basis of accounting.
Answer to Problem 3.13E
Net income of Incorporation C under cash basis of accounting is $5,290.
Explanation of Solution
Cash basis of accounting:
Cash basis of accounting refers to the recognition of financial transactions only when the cash is received or paid.
Calculate the net income under cash basis accounting:
Particulars | Amount($) | Amount ($) |
Cash receipts | (3) 14,580 | |
Less: Cash payments | (4) 9,920 | |
Net income | $5,290 |
Table (3)
Calculate the cash receipts:
Calculate the cash payments:
- According to the cash basis of accounting, the net income is $5,290 which higher than the accrual basis of accounting.
- The recording of the expenses and revenues differ from the accrual basis of accounting.
- Hence, the net income is different for the accrual basis of accounting and cash basis of accounting.
Want to see more full solutions like this?
Chapter 3 Solutions
FIN.ACCTG:ACC 101 CUST.CONNECT-W/ETXT C
- Net income and dividends The income statement for the month of February indicates a net income of 17,500. During the same period, 25,500 in cash dividends were paid. Would it be correct to say that the business incurred a net loss of 8,000 during the month? Discuss.arrow_forwardNet income and dividends The income statement of a corporation for the month of November indicates a net income of $90,000. During the same period, $100,000 in cash dividends were paid. Would it be correct to say that the business incurred a net loss of $10,000 during the month? Discuss.arrow_forwardProvide journal entries to record each of the following transactions. For each, identify whether the transaction represents a source of cash (S), a use of cash (U), or neither (N). A. Paid $22,000 cash on bonds payable. B. Collected $12,600 cash for a note receivable. C. Declared a dividend to shareholders for $16,000, to be paid in the future. D. Paid $26,500 to suppliers for purchases on account. E. Purchased treasury stock for $18,000 cash.arrow_forward
- Juroe Company provided the following income statement for last year: Juroes balance sheet as of December 31 last year showed total liabilities of 10,250,000, total equity of 6,150,000, and total assets of 16,400,000. Required: Note: Round answers to two decimal places. 1. Calculate the times-interest-earned ratio. 2. Calculate the debt ratio. 3. Calculate the debt-to-equity ratio.arrow_forwardProvide journal entries to record each of the following transactions. For each, also identify *the appropriate section of the statement of cash flows, and s utility bill, $1,500arrow_forwardCommon stock transactions on the statement of cash flows Jones Industries received 600,000 from issuing shares of its common stock and 400,000 from issuing bonds. During the year, Jones Industries also paid dividends of 60,000. How are the effects of these transactions reported on the statement of cash flows?arrow_forward
- Analyzing Transactions. Using the analytical framework, indicate the effect of the following related transactions of a firm. a. January 1: Issued 10,000 shares of common stock for 50,000. b. January 1: Acquired a building costing 35,000, paying 5,000 in cash and borrowing the remainder from a bank. c. During the year: Acquired inventory costing 40,000 on account from various suppliers. d. During the year: Sold inventory costing 30,000 for 65,000 on account. e. During the year: Paid employees 15,000 as compensation for services rendered during the year. f. During the year: Collected 45,000 from customers related to sales on account. g. During the year: Paid merchandise suppliers 28,000 related to purchases on account. h. December 31: Recognized depreciation on the building of 7,000 for financial reporting. Depreciation expense for income tax purposes was 10,000. i. December 31: Recognized compensation for services rendered during the last week in December but not paid by year-end of 4,000. j. December 31: Recognized and paid interest on the bank loan in Part b of 2,400 for the year. k. Recognized income taxes on the net effect of the preceding transactions at an income tax rate of 40%. Assume that the firm pays cash immediately for any taxes currently due to the government.arrow_forwardUsing the January 1 and December 31, 20Y8, data given in Question 10, answer the following question: If Sylvester Consulting paid $18,000 of dividends during 20Y8, what was the amount of net income for 20Y8?arrow_forward
- Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage LearningFinancial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning