Question

Listed below are several transactions that took place during the second and third years of operations for RPG Company.

	Year 2			Year 3
Amounts billed to customers for services rendered	$	290,000		$	390,000
Cash collected from credit customers		200,000			340,000
Cash disbursements:
Payment of rent		74,000			0
Salaries paid to employees for services rendered during the year		134,000			154,000
Travel and entertainment		24,000			34,000
Advertising		12,000			29,000

In addition, you learn that the company incurred advertising costs of $19,000 in year 2, owed the advertising agency $4,400 at the end of year 1, and there were no liabilities at the end of year 3. Also, there were no anticipated bad debts on receivables, and the rent payment was for a two-year period, year 2 and year 3.

Required:
1. Calculate accrual net income for both years.
2. Determine the amount due the advertising agency that would be shown as a liability on RPG’s balance sheet at the end of year 2.
  

Answer 1

1.

Income statement (Year 2)

Amounts billed to customers for services rendered	290,000
Expenses:
Rent expense 37,000
Salaries paid to employees for services rendered during the year 134,000
Travel and entertainment 24,000
Advertising 19,000
Total expenses	-214,000
Net income	$76,000

Income statement (Year 3)

Amounts billed to customers for services rendered	390,000
Expenses:
Rent expense 37,000
Salaries paid to employees for services rendered during the year 154,000
Travel and entertainment 34,000
Advertising 17,600
Total expenses	-242,600
Net income	$147,400

2.

Amount due to advertising agency at the end of year 2 = Amount due to advertising agency at the end of year 1 + Advertising expenses in year 2 - Cash paid to advertising agency in year 2

= 4,400 + 19,000 - 12,000

= $11,400

Advertisement expense for the third year = Advertisement payment in third year - Amount due to advertising agency at the end of year 2

= 29,000 - 11,400

= $17,600

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