Question

The information below for questions (a) and (b) Toyoda Inc. is a Japanese firm located in Tokyo. The firm collected JPY 190,000 from customers in 2018. Of the amount collected, JPY 40,000 was from revenue accrued from services performed in 2017, and JPY 20,000 was received in advance for 2019 revenue. Furthermore, the firm incurred JPY 78,000 of expenses in 2018, which will not be paid until 2019. The firm also incurred JPY 29,000 of expenses in 2018 which had been paid in 2017. The firm paid JPY 150,000 for expenses in 2018. Of the amount paid, JPY 50,000 was for expenses incurred on account in 2017, JPY 22,000 was paid in advance for 2019 expenses. The firm also earned JPY 60,000 of revenue in 2018, which will not be collected until 2019. The firm also earned JPY 25,000 of revenue in 2018 which had been collected in 2017.

(a) Compute 2018 Toyoda Inc.’s cash-basis net income! (2 points)

(b) Compute 2018 Toyoda Inc.’s accrual-basis net income! (3 points)

(c) Kishida-san is the CEO of Hyakuen Inc. He asks you, as the firm's accounting manager, regarding cash issues that he was confused. He was unsure whether cash equivalents are the same as cash. He was also unsure of how the restricted cash funds shall be reported on the balance sheet. Explain! (3 points)

(d) Herr Lahm is the CEO of Danke Mobile Inc. Danke Mobile Inc. is a German firm located in Munich. You were hired as the Danke Mobile Inc.'s accounting manager. You have just presented the GAAP of receivables. However, Herr Lahm could not understand why cash realizable value does not decrease when an uncollectible account is written off under the allowance method. You are required to explain this point to Herr Lahm! (2 points)

Answer 1

A) Toyoda Inc's Net income on cash basis:

Particulars	Amount in JPY
Amount collected from Customers in 2018	190000
Less: Expenses incurred in 2018	150000
Net Income	40000

B) Toyoda Inc's Net income on Accrual basis:

Particulars	Amount in JPY
Amount collected from Customers in 2018	190000
Add: Revenue earned but not collected	60000
Add: Income of current year received in previous year	25000
Less: Revenue received in current year but relating to 2017	-40000
Less: Revenue for 2019 received in current year	-20000
Total income (A)	215000
Accrued expenses of 2018	78000
Add: Prepaid expenses of last year reversed now	29000
Add: Expenses incurred in current year 2018	150000
Less: Expenses of 2017 paid now	-50000
Less:Prepaid expenses	-22000
Total Expenses (B)	185000
Net Income (A-B)	30000

C) Difference between cash and cash equivalents: Cash is generally the currency/money in hand/in bank account of the business. whereas cash equivalents are not in the form of cash. They are in the form of securities such as treasury notes. They are named after cash equivalents because the they require no time to convert into cash. In simple, they are easily convertible into cash with less efforts.

Presentation of restricted cash: Restricted cash is shown as separate line item in the statement of financial position (Balance sheet). The balance of restricted cash should not be added to the cash and cash equivalent balance, it should be shown separately.

D) Allowance method for writingoff accounts receivable: Uncollectable account/bad debts account under allowance method on a yearly basis based on past experience on credit sales collectability. Suppose, if the company experiences 5% baddebts for every $100,000 sale, the company creates $5,000 for baddebts as provision in that year irrespective of whether they really turn bad or not. So, when already created fictitious provision which involved no cash outflow/inflow in the year of sale, is reversed now, there would not be any realisation of cash