Question

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

	Year 2			Year 3
Amounts billed to customers for services rendered	$	270,000		$	370,000
Cash collected from credit customers		180,000			320,000
Cash disbursements:
Payment of rent		72,000			0
Salaries paid to employees for services rendered during the year		132,000			152,000
Utilities		22,000			32,000
Advertising		11,000			27,000

In addition, you learn that the company incurred advertising costs of $17,000 in year 2, owed the advertising agency $4,200 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

Answer 1 :

Accrual net income for both years.

	Year 2	Year 3
Revenues	$270,000	$370,000
Expenses:
Rent ($72,000 / 2)	(36,000)	(36,000)
Salaries	(132,000)	(152,000)
Utilities	(22,000)	(32,000)
Advertising [Note 1]	(17,000)	(16,800)
Net income	$63,000	$133,200

Note 1 :

Advertising expense for year 2 = Costs incurred in Year 2 = $17,000.

Advertising Liability for year 2 = Beginning liability (Year 1 liability) + Cost incurred during the year 2 – Amount paid during year

= $4,200 + $17,000 - $11,000 = $10,200.

Advertising expense for year 3 (ie Costs incurred in Year 3) = Amount paid during year - Beginning liability (Year 2 liability)

= $27,000 - $10,200 = $16,800.

Answer 2 : Amount due the advertising agency that would be shown as a liability on RPG’s balance sheet at the end of year 2

= $10,200.

Explanation :

Advertising Liability for year 2 = Beginning liability (Year 1 liability) + Cost incurred during the year 2 – Amount paid during year

= $4,200 + $17,000 - $11,000 = $10,200.