Question

Exercise 1-2 Accrual accounting [LO1-2]

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	$	450,000		$	550,000
Cash collected from credit customers		360,000			500,000
Cash disbursements:
Payment of rent		90,000			0
Salaries paid to employees for services rendered during the year		150,000			170,000
Travel and entertainment		40,000			50,000
Advertising		20,000			45,000

In addition, you learn that the company incurred advertising costs of $35,000 in year 2, owed the advertising agency $6,000 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

• All working forms part of the answer
• Transaction and there effect to respective years

Year 2

Transactions	Amount ($)	Debit	Credit
Amount billed	450000	Accounts receivables 450000	Service Revenue 450000
Cash Collected	360000	Cash 360000	Accounts receivables 360000
Rent paid	90000	Rent Expenses 45000, Prepaid Rent 45000	Cash 90000
Salaries paid	150000	Salaries expenses 150000	Cash 150000
Travel & Entertainment	40000	Travel & Entertainment 40000	Cash 40000
Advertising	35000	Advertising expense 35000, Accounts payable 20000	Accounts payable 35000, Cash 20000

Year 3

Transactions	Amount ($)	Debit	Credit
Amount billed	550000	Accounts receivables 550000	Service Revenue 550000
Cash Collected	500000	Cash 500000	Accounts receivables 500000
Rent paid	0	Rent Expenses 45000	Prepaid Rent 45000
Salaries paid	170000	Salaries expenses 170000	Cash 170000
Travel & Entertainment	50000	Travel & Entertainment 50000	Cash 50000
Advertising	45000	Advertising expense 24000, Accounts payable 21000	Cash 45000

• Requirement 1: Net Income

	Year 2 ($)	Year 3 ($)
Service revenue	450000	550000
Expenses:
Rent expenses	45000	45000
Salaries expenses	150000	170000
Travel and Entertainment expenses	40000	50000
Advertising expenses	35000	24000
Total Expenses	270000	289000
Net Income	$180000	$261000

• Requirement 2

Opening Balance for year 2	$6000
year 2 Advertising cost incurred	$35000
(-) Paid in Year 2	$20000
Closing balance at Year 2	$21000

The amount due the advertising agency that would be shown as a liability on RPG’s balance sheet at the end of year 2 = $ 21000