Question

Consider the amount and timing of the following transactions made by J. Doe

December, 2014 : Purchased, paid for and applied fertilizer for the 2015 crop. $10,000.

April, 2015: Purchased and paid for seed, fuel, etc. $80,000

November 2015 : Half of crops sold for $90,000. The rest placed in storage to sell in 2016, valued currently at $90,000.

December 31, 2015: Accrued interest, $1,000.

January 15, 2016: Paid accrued interest.

May, 2016: Remaining 2015 crop sold. $105,000

1. What is the 2015 net farm income under cash accounting? (Show work.)

2. What is the 2015 net farm income under accrual accounting? (Show work.)

Answer 1

Under Cash Accounting, revenue is recognized when payment is received and expense is recognized as and when payment is made. It helps us to find out how much net cash a company has earned during the end of a particular period.

A) Net farm income under cash accounting:

Revenue:    Amount

Crops sold ( November 2015) 90,000

Less: Expenses:

Purchased and paid for seed, fuel (April 2015) (80,000)

Net farm income as per cash accounting for 2015   10,000

Note:

1) Since the payment for fertilizer of $10,000 is made in december 2014, the same will not come under cash accounting.

2) Remaining crops as on Dec 2015 is not sold, the same is not taken.

3) Accruals will not come under cash accounting. Hence accrues interest is not considered.

B) Net farm income under accrual accounting:

Revenue: Amount

Crops sold ( November 2015) 90,000

Remaining crops to be sold in 2016 90,000

Accrued Interest 10,000

Total 1,90,000  

Less: Expenses

Purchased and paid for seed, fuel (April 2015) (80,000)

Net farm income as per accrual accounting for 2015   1,10,000

Note:

Accrual system recognizes income and expense even if the same has not been received or paid. Hence purchased and applied for fertilizer will be taken in 2014 and not in 2015.

Similarly remaining crops valued $90,000 to be sold in 2016 will be considered in 2015 only even though the actual value sold for in May 2016 is $ 105,000.