Question

(2 pts) Accrual basis vs. basis – revenue and expense recognition: Suppose Capaldi Corp. provides travel services to customers and noted the following transactions for May 2018:

Transaction:	Accrual basis revenue / (expense):	Cash basis revenue / (expense):
Provided services to customers for $2,920 in cash.	$2,920 revenue	$2,920 revenue
Paid $6,000 in cash for June’s rent.
Received $3,900 in cash from customers for services to be provided in June.
Received bill from insurance company for May’s monthly premium of $2,000. Cash payment will be made on June 7th.
Paid $600 in cash for utilities used in May.
Paid workers $9,100 in cash for work performed in April.
Received $8,100 in cash from customers for services provided in April on account.
Issued common stock for $10,000 in cash.
Provided services to customers for $5,900 on account. Cash collections related to these services will not be received from customers until June.

For each transaction, determine the amount of revenue or (expense), if any, that is recorded under accrual-basis accounting and under cash-basis accounting for May 2018. I have completed transaction a. for you as an example.

(2 pts) Accrual Based Accounting: Prepaid expenses – Depreciation of Fixed Assets. Moving On, Inc. purchases a new moving truck (e.g. ‘equipment’) for $56,000 on October 1^st, 2017. At the time of its purchase, the truck is expected to be used in operations for 4 years and will have no resale or scrap value at the end of its life. Assume Moving On, Inc. uses straight-line depreciation (i.e. the asset depreciates evenly) over the expected life of the truck.

Record the journal entry for the original purchase of the truck that occurs on October 1^st, 2017.

Record the adjusting entry to recognize Depreciation Expense on December 31, 2017.

What will the ending balance of the Accumulated Depreciation account be on December 31, 2018 (Assume the beginning balance of Accumulated Depreciation on January 1^st, 2017 is $0 and Moving On, Inc. has no other assets that depreciate)?

What will the net book value of the truck be on December 31, 2018?

Answer 1

Ans:

Transaction	Accrual basis	Cash basis
Provided services to customers for $2,920 in cash,	$2,920 Revenue	$2,920 Revenue
Paid $6,000 in cash for June’s rent.	Nil	$6,000 Expese
Received $3,900 in cash from customers for services to be provided in June.	Nil	$3,900 Revenue
Received bill from insurance company for May’s monthly premium of $2,000. Cash payment will be made on June 7th.	$2,000 Expense	Nil
Paid $600 in cash for utilities used in May.	$600 expense	$600 expense
Paid workers $9,100 in cash for work performed in April.	nil	$9,100 Expense
Received $8,100 in cash from customers for services provided in April on account.	nil	$8,100 Revenue
Issued common stock for $10,000 in cash.	$10,000 revenue	$10,000 revenue
Provided services to customers for $5,900 on account. Cash collections related to these services will not be received from customers until June.	$5,900 Revenue	Nil

Journal entry for purchase of The truck:

Account name	Debit	Credit
Truck	$56,000
Cash		$56,000
(To record purchase of asset on cash)

Adjusting entry to recognize Depreciation expense on 31st December, 2017:

Account name	Debit	Credit
Depreciation expense	$3,500
Accumulated Depreciation		$3,500
(To record Depreciation expense)

Working notes: Calculating Amount of depreciation expense:

Depreciation = 56,000/4

= $14,000 p.a.

Number of months the truck is used in 2017 is 3 months(1st oct 2017 To 31st Dec. 2017)

So, the depreciation for the year ending 2017 is, 14,000*3/12 = $3,500.

Calculating net book value of the Truck on December 31, 2018:

Particulars	Amount(in $)
Openig book value on 1st jan. 2018 (56,000-3,500)	52,500
Less: Current year depreciation	(14,000)
Net book value on 31 Dec. 2018	38,500

Calculating Accumulated depreciation Account balance on 31st December 2018:

Date	particulars	amount(in $)	Date	particulars	amount(in $)
			01.01 2017	Opening balance	Nil
31.12.2017	To balance c/d	3,500	31.12.2017	Depreciation expense	3,500
		3,500			3,500
			01.01. 2018	By balance b/d	3,500
31.12.2018	To bal c/d	17,500	31.12.2018	By Depreciation expense	14,000
		17,500			17,500

The accumulated depreciation account balance as on 31.12.2018 is $17,500

Thank you,