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Chapter 3: Q18E (page 135)

(L07) (Cash to Accrual Basis) Jill Accardo, M.D., maintains the accounting records of Accardo Clinic on a cash basis. During 2017, Dr. Accardo collected \(142,000 from her patients and paid \)55,470 in expenses. At January 1, 2017, and December 31, 2017, she had accounts receivable, unearned service revenue, accrued expenses, and prepaid expenses as follows. (All long-lived assets are rented.)

January 1, 2017, December 31,2017

Account receivable \(9,250 \)15,927

Unearned service revenue \(2,840 \)4,111

Accrued expenses \(3,435 \)2,108

Prepaid expenses \(1,917 \)3,232

Instructions:

Prepare a schedule that converts Dr. Accardo鈥檚 鈥渆xcess of cash collected over cash disbursed鈥� for the year 2017 to net income on an accrual basis for the year 2017.

Short Answer

Expert verified

Revenue on an Accrual Basis is$148,006

Expenses on an Accrual Basis are$52,828

Net income on an Accrual Basis is $95,178

Step by step solution

01

Meaning of Income Statement

The income statement is one of the company鈥檚 core financial statements that shows the company鈥檚 profit and loss over a period of time. The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities.

02

Conversion of Income Statement

Jill Accardo, M.D.

Conversion of Income Statement Data

from Cash Basis to Accrual Basis for the year 2017

Cash

Basis
Adjustments

Accrual

Basis
Add
Deduct

Collection from customers:

$ 142,600

$ 142,600

Less: Accounts receivable, Jan 1

$ 9,250

$(9,250)

Add: Accounts receivable, Dec31

$15,927

$15,927

Add: Unearned service revenue, Jan 1

$ 2,840

$2,840

Less: Unearned service revenue Dec31

$ 4,111

$ (4,111)

Service Revenue

$ 142,600

$18,767

$ 13,361

$ 148,006

Disbursement for expenses:

$55,470

$ 55,470

Less: Accrued expense, Jan1

$3,435

$(3,435)

Add: Accrued expenses, Dec31

$ 2,108

$ 2,108

Add: Prepaid expenses, Jan1

$1,917

$ 1,917

Less: Prepaid expenses Dec31

$3,232

$ (3,232)

Operating Expenses

$ 55,470

$ 4,025

$ 6,667

$52,828

Net Income 鈥� Cash Basis

$ 87,130

Net Income- Accrual Basis

$ 95,178

03

Supporting calculations


Conversion of Cash Revenue to Accrual Revenue:

Cash receipts from customers

$ 142,600

Less: Beginning accounts receivable

$ (9,250)

Add: Ending accounts receivable

$ 15,927

Add: Beginning Unearned revenue

$ 2,840

Less: Ending Unearned revenue

$ (4,111)

Revenue on the Accrual basis

$ 148,006


Conversion of Cash expenses to Accrual expenses:

Cash paid to operating expenses

$ 55,470

Less: Beginning accrual expenses

$ (3,435)

Add: Ending accrual expenses

$ 2,108

Add: Beginning prepaid expenses

$ 1,917

Less: Ending Prepaid Expenses

$ (3,232)

Expenses on the Accrual Basis

$ 52,828

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Most popular questions from this chapter

E3-7 (L03) (Analyze Adjusted Data) A partial adjusted trial balance of Piper Company at January 31, 2017, shows the following.

PIPER COMPANY

ADJUSTED TRIAL BALANCEJANUARY 31, 2017

Debit (\() Credit(\))Supplies \( 700Prepaid Insurance 2,400Salaries and Wages Payable \) 800UnearnedService Revenue 750Supplies Expense 950Insurance Expense 400Salaries and Wages Expense 1,800Service Revenue 2,000

InstructionsAnswer the following questions, assuming the year begins January 1.(a) If the amount in Supplies Expense is the January 31 adjusting entry, and \(850 of supplies was purchased in January,what was the balance in Supplies on January 1?(b) If the amount in Insurance Expense is the January 31 adjusting entry, and the original insurance premium was for oneyear, what was the total premium and when was the policy purchased?(c) If \)2,500 of salaries was paid in January, what was the balance in Salaries and Wages Payable at December 31, 2016?(d) If $1,600 was received in January for services performed in January, what was the balance in Unearned Service Revenueat December 31, 2016?

The financial statements of (M&S) are presented in Appendix E. The company's complete annual report, including the notes to the financial statements, is available online.

Instructions

Refer to M&S鈥檚 financial statements and the accompanying notes to answer the following questions.

(a) What were M&S鈥檚 total assets at 28 March 2015? At 29 March 2014?

(b) How much cash (and cash equivalents) did M&S have on 28 March 2015?

(c) What were M&S鈥檚 selling and marketing expenses in 2015? In 2014?

(d) What were M&S鈥檚 revenues in 2015? In 2014?

(e) Using M&S鈥檚 fi nancial statements and related notes, identify items that may result in adjusting entries for prepaymentsand accruals.

(f) What were the amounts of M&S鈥檚 depreciation and amortization expense in 2014 and 2015?

Do the following events represent business transactions?

Explain your answer in each case

  1. A computer is purchased on account.
  2. A customer returns merchandise and is given credit on account.
  3. A prospective employee is interviewed
  4. The owner of the business withdraws cash from the business for personal use.
  5. Merchandise is ordered for delivery next month.

Agazzi Repair Shop had the following transactions during the first month of business as a proprietorship. Journalize the transactions. (Omit explanations.) Aug. 2 Invested \(12,000 cash and \)2,500 of equipment in the business. 7 Purchased supplies on account for \(500. (Debit asset account.) 12 Performed services for clients, for which \)1,300 was collected in cash and \(670 was billed to the clients. 15 Paid August rent \)600. 19 Counted supplies and determined that only $270 of the supplies purchased on August 7 are still on hand.

Distinguish between cash-basis accounting and accrual-basis accounting. Why is accrual-basis accounting acceptable for most businesses and the cash-basis unacceptable in the preparation of an income statement and a balance sheet?
See all solutions

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