Question

Listed below are several transactions that took place during the second and third years of operations for RPG Company. Year 2 Year 3 Amounts billed to customers for services rendered $ 370,000 $ 470,000 Cash collected from credit customers 280,000 420,000 Cash disbursements: Payment of rent 82,000 0 Salaries paid to employees for services rendered during the year 142,000 162,000 Travel and entertainment 32,000 42,000 Advertising 16,000 37,000 In addition, you learn that the company incurred advertising costs of $27,000 in year 2, owed the advertising agency $5,200 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. Calculate accrual net income for both years. Question 1 Year 2 Year 3 Revenues Expenses: Rent Salaries Travel and entertainment Advertising Net income Question 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

Solution 1:

Computation of Accrual Net Income
Particulars	Year 2	Year 3
Services Revenues	$3,70,000.00	$4,70,000.00
Expenses:
Rent ($82,000/2)	$41,000.00	$41,000.00
Salaries	$1,42,000.00	$1,62,000.00
Travel and Entertainment expenses	$32,000.00	$42,000.00
Advertising Expenses (See note)	$27,000.00	$20,800.00
Total Expenses	$2,42,000.00	$2,65,800.00
Net Income	$1,28,000.00	$2,04,200.00

Note:

Advertising Expense for year 3 = Cash payment for advertising in Year 3 - Amount due to Advertising agency at the end of year 2

Amount due to Advertising agency at the end of year 2 = Amount Due at end of year 1 + Advertising expenses incurred for Year 2 - Cash paid in year 2 for advertising

= 5200 + 27000 -16000 = $16,200

Advertising Expense for year 3 = 37000 - 16200 = $20,800

Solution 2:

Amount due to Advertising agency at the end of year 2 = Amount Due at end of year 1 + Advertising expenses incurred for Year 2 - Cash paid in year 2 for advertising

= 5200 + 27000 -16000 = $16,200