Fantastic Catering completed the following selected transactions during May 2016: May 1. Prepaid rent for three months, $1,800. 5. Received and paid electricity bill,$200. 9. Received cash for meals served to customers, $1,900. 14. Paid cash for kitchen equipment,$3,300. 23. Served a banquet on account, $3,600. 31. Made the adjusting entry for rent (from May 1 ). 31. Accrued salary expense,$1,300. 31. Recorded depreciation for May on kitchen equipment, $55.

Requirements

1. Show whether each transaction would be handled as a revenue or an expense using both the cash basis and accrual basis accounting systems by completing the following table. (Expenses should be shown in parentheses.) Also, indicate the dollar amount of the revenue or expense. The May 1 transaction has been completed as an example.

$$\begin{array}{c} \textbf{Amount of Revenue (Expense for May)} \end{array}$$

$$\begin{array}{lcc} \hline \text{Date} & \text{Cash Basis Amount of Revenue (Expense)} & \text{Accrual Basis Amount of Revenue (Expense)} \\ \hline \text{May 1} & \$(1,800) & \$ 0 \\ \hline \end{array}$$

2. After completing the table, calculate the amount of net income or net loss for Fantastic Catering under the accrual basis and cash basis accounting systems for May.
3. Considering your results from Requirement 2, which method gives the best picture of the true earnings of Fantastic Catering? Why?

Which balance sheet account provides evidence that Tootsie Roll records sales on an accrual basis rather than a cash basis? Explain.

Consider the following transactions.

$$\begin{matrix} \text{ } & \text{Accrual-Basis} & \text{ } & \text{Cash-Basis} & \text{ } & \text{ }\\ \text{Transaction} & \text{Revenue} & \text{Expense} & \text{Revenue} & \text{Expense}\\ \text{1. Receive cash from customers at the time} & \text{ } & \text{ } & \text{ } & \text{ }\\ \text{of service, $\$ 3,700$ .} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_}\\ \text{2. Issue common stock for cash, $\$ 6,000$ .} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_}\\ \text{3. Receive cash from customers who were} & \text{ } & \text{ } & \text{ } & \text{ }\\ \text{previously billed, $\$ 1,700$ .} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_}\\ \text{4. Incur utilities cost in the current month} & \text{ } & \text{ } & \text{ } & \text{ }\\ \text{but do not pay, $\$ 600$ .} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_}\\ \text{5. Pay workers' salaries for the current} & \text{ } & \text{ } & \text{ } & \text{ }\\ \text{month, $\$ 700$ .} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_}\\ \text{6. Pay for rent one year in advance, $\$ 3,600$ .} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_}\\ \text{7. Repay a long-term note to the bank,} & \text{ } & \text{ } & \text{ } & \text{ }\\ \text{$\$ 3,000$ .} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_}\\ \text{8. Pay workers' salaries for the previous} & \text{ } & \text{ } & \text{ } & \text{ }\\ \text{month, $\$ 850$ .} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_}\\ \text{9. Pay dividends to stockholders, $\$ 500$ .} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_}\\ \text{10. Purchase office supplies for cash, $\$ 540 .$} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_} & \text{\_\_\_\_\_}\\ \end{matrix}$$

For each transaction, determine the amount of revenue or expense, if any, that is recorded under accrual-basis accounting and under cash-basis accounting.

Suppose you work summers house-sitting for people while they are away on vacation. Some of your customers pay you immediately after you finish a job. Some customers ask you to send them a bill. It is now June 30 and you have collected $900 from cash-paying customers. Your remaining customers owe you$1,300. Requirements

1. How much service revenue would you have under the a. cash basis? b. accrual basis?
2. Which method of accounting provides more information about your house-sitting business?

What basis is used to prepare the statement of cash flows?

At the end of the current year, $22,650 of fees have been earned but have not been billed to clients. b. If the cash basis rather than the accrual basis had been used, would an adjusting entry have been necessary? Explain.

Latta Corp. maintains its financial records on the cash basis of accounting. Interested in securing a long-term loan from its regular bank, Latta Corp. requests you as its independent CPA to convert its cash-basis income statement data to the accrual basis. You are provided with the following summarized data covering 2011, 2012, and 2013.

$$\begin{array}{lrrr} & \textbf{2011} & \textbf{2012} & \textbf{2013}\\ \\ \text{Cash receipts from sales:}\\ \text{$\quad$On 2011 sales} & \$290,000 & \$160,000 & \$30,000\\ \text{$\quad$On 2012 sales} & 0 & 355,000 & 90,000\\ \text{$\quad$On 2013 sales} &&& 408,000\\ \text{Cash payments for expenses:}\\ \text{$\quad$On 2011 expenses} & 185,000 & 67,000 & 25,000\\ \text{$\quad$On 2012 expenses} & \text{(a) 40,000} & 170,000 & 55,000\\ \text{$\quad$On 2013 expenses} && \text{(b)45,000} & 218,000 \end{array}$$

(a) Prepayments of 2012 expenses.

(b) Prepayments of 2013 expenses.

Instructions

(a) Using the data above, prepare abbreviated income statements for the years 2011 and 2012 on the cash basis.

(b) Using the data above, prepare abbreviated income statements for the years 2011 and 2012 on the accrual basis.

Charlotte’s Golf School completed the following transactions during March, 2012:

Mar 1. Prepaid insurance for March through May, $600. 4. Performed services (gave golf lessons) on account,$2,500. 5. Purchased equipment on account, $1,600. 8. Paid property tax expense,$100. 11. Purchased office equipment for cash, $1,500. 24. Performed services and received cash,$900. 26. Collected $400 on account. 29. Paid account payable from March 5. 29. Paid salary expense,$1,000. 31. Recorded adjusting entry for March insurance expense (see March 1). 31. Debited unearned revenue and credited revenue in an adjusting entry, $1,200.

Requirements

1. Prepare journal entries for each transaction.
2. Using the journal entries as a guide, show whether each transaction would be handled as a revenue or an expense, using both the accrual and cash basis, by completing the following table.

$$\begin{array}{c} \textbf{Amount of Revenue (Expense) for March} \end{array}$$

$$\begin{array}{c|c|c} \hline &\text { Cash-Basis Amount }&\text { Accrual-Basis Amount } \\ \text { Date } &\text { of Revenue (Expense) } &\text { of Revenue (Expense) } \\\hline \text{Mar 1} \end{array}$$

3. After completing the table, calculate the amount of net income or net loss for the company under the accrual and cash basis for March.
4. Considering your results from Requirement 3, which method gives the best picture of the true earnings of Charlotte’s Golf School? Why

Refer to the financial statement data for Eaton Company in the previous exercise.

Required:

1. Using the direct method, adjust the company’s income statement for 2011 to a cash basis.

2. Using the information obtained in (1) above, along with an analysis of the remaining balance sheet accounts, prepare a statement of cash flows for 2011.

Jill Accardo, M.D., maintains the accounting records of Accardo Clinic on a cash basis. During 2020, Dr. Accardo collected $142,600 from her patients and paid$55,470 in expenses. At January 1, 2020, and December 31, 2020, she had accounts receivable, unearned service revenue, accrued expenses, and prepaid expenses as follows. (All long-lived assets are rented.)

Instructions

Prepare a schedule that converts Dr. Accardo's "excess of cash collected over cash disbursed" for the year 2020 to net income on an accrual basis for the year 2020.

Rising Stars Academy provided the following information on its 2019 balance sheet and statement of cash flows:

Required:

1. Calculate the following ratios for Rising Stars: (a) debt to equity, (b) debt to total assets, (c) long-term debt to equity, (d) times interest earned (accrual basis), and (e) times interest earned (cash basis). (Note: Round answers to three decimal places.)

2. Interpret these results.

Refer to the data in previous exhibit for Metals Company for 2014 (based on financial statements of Alcoa). Derive a presentation of cash flow from operations using the direct method.

At the end of the current year, $8,450 of fees have been earned but have not been billed to clients.

b. If the cash basis rather than the accrual basis had been used, would an adjusting entry have been necessary? Explain.

Which one of the following temporary differences will result in a deferred tax asset? a. Use of the straight-line depreciation method for financial statement purposes and the modified Accelerated Cost Recovery System (MACRS) for income tax purposes. b. Installment sale profits accounted for on the accrual basis for financial statement purposes and on a cash basis for income tax purposes. c. Advance rental receipts accounted for on the accrual basis for financial statement purposes and on a cash basis for tax purposes. d. Investment gains accounted for under the equity method for financial statement purposes and under the cost method for income tax purposes. Questions 2 and 3 are based on the following information. Bearings Manufacturing Company Inc. purchased a new machine on January 1, 2017 for $100,000. The company uses the straight-line depreciation method with an estimated equipment life of 5 years and a zero salvage value for financial statement purposes, and uses the 3-year Modified Accelerated Cost Recovery System (MACRS) with an estimated equipment life of 3 years for income tax reporting purposes. Bearings is subject to a 35% marginal income tax rate. Assume that the deferred tax liability at the beginning of the year is zero and that Bearings has a positive earnings tax position. The MACRS depreciation rates for 3-year equipment are shown below. Year Rate 1 33.33% 2 44.45% 3 14.81% 4 7.41%