Question

Fragrant sold $4,000 worth of perfume to customers, of which 90% paid in cash and the rest still owe. The cost of the perfume was $1,000 as has not been paid yet. All other operating costs incurred, totaling $1,200, have been paid. How much does accrual basis income differ from cash basis income?: *

A) They are the same. B) Accrual basis income is $600 lower than cash basis income. C) Accrual basis income is $600 higher than cash basis income. D) Accrual basis income is $1,000 lower than cash basis income. E) Accrual basis income is $1,000 higher than cash basis income. 2. Lavish Interiors Magazine sells 24-month subscriptions for $60 each. Whenever customers buy a subscription, Lavish debits cash and credits unearned subscription revenue. During the month of November, the magazine collected $60,000 for new subscriptions beginning in December. If Lavish fails to record an adjusting entry pertaining to these subscriptions on December 31st, how would the financial statements be affected?: * A) No adjusting entry is required at December 31st. B) Revenue will be overstated by $2,500. C) Revenue will be understated by $2,500. D) Revenue will be overstated by $60,000. E) Revenue will be understated by $60,000.

3. Blades Inc. sold off the roller skate segment of its business during the year, incurring a $125,000 loss on the sale of the segment’s assets and recognizing $15,000 of profit for the partial period that the roller skate segment operated during the year. The applicable tax rate is 30%. What is the amount reported as discontinued operations after the subtotal “Income from Continuing Operations?”: *

A) Loss on discontinued operation $125,000 B) Loss on discontinued operation $87,500 C) Loss on discontinued operation $110,000 D) Loss on discontinued operation $77,000 E) Gain on discontinued operations $4,500 4. Solar Inc.’s 20X1’s results are shown below. What would “Income Before Taxes” on the multiple-step Income Statement be for the Year Ended 20X1? Sales, net of returns and allowances $300,000 Cost of Goods Sold $100,000 Salaries and Wages Expense $50,000 Interest Revenue $1,000 Loss on sale of long term assets $5,000 Interest Expense $5,000 Loss from Change in Accounting Principle, net of tax $1,000 Income Tax Expense $30,000 Occupancy Expense $60,000 : * A) $91,000 B) $90,000 C) $86,000 D) $56,000 E) $55,000 5. Prepaid Insurance was $10,000 at the beginning of the period and $5,000 at the end of the period. Insurance expense in the Income Statement for the period was $47,000. What is the adjustment to Net Income in the indirect method on the Cash Flow Statement because of the rent transactions for the period?: * A) Increase Net Income by $5,000 B) Increase Net Income by $10,000 C) Increase Net Income by $15,000 D) Decrease Net Income by $5,000 E) Decrease Net Income by $10,000

Answer 1

1.
Income under cash basis = $4000 x 90% - $1200 = $2400
Income under accrual basis = $4000 - $1000 - $1200 = $1800

Since income under cash basis is greater by $600 i.e. $2400 - $1800

Answer is (B) Accrual basis income is $600 lower than cash basis income.

2.
Cash collected in November = $60000 i.e. for 24 months
Revenue linked with the year is for 1 month i.e. $60000 / 24 = $2500

Therefore Answer is (C) Revenue will be understated by $2,500.

3.
Loss on discontinued operations = Loss on the sale of the segment’s assets - Profit for partial period
= $125000 - $15000 = $110000

Answer is (C) Loss on discontinued operation $110,000

4.
Income before taxes = Sales - Cost of Goods Sold - Salaries and Wages expense - Occupancy Expense - Interest expense + Interest Revenue
= $300,000 - $100,000 - $50,000 - $60,000 - $5,000 + $1,000 = $86,000

Answer is (C) $86,000
5.
Adjustment is for change in value of current assets
Since Prepaid insurance has decreased, it will be added back to Net income by $10000 - $5000 i.e. $5000

Answer is (A) Increase Net Income by $5,000