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 $400,000 $500,000

Cash collected from credit customers 310,000 450,000

Cash disbursements:

Payment of rent 85,000 0

Salaries paid to employees for services rendered during the year 145,000 165,000

Travel and entertainment 35,000 45,000

Advertising 17,500 40,000

In addition, you learn that the company incurred advertising costs of $30,000 in year 2, owed the advertising agency $5,500 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

1)

	year 2	year3
Service revenue	400000	500000
less;expense
Rent expense [85000/2]	(42500)	(42500)
salaries	(145000)	(165000)
Travel and entertainment	(35000)	(45000)
advertising	(30000)	(22000)
net income	147500	225500

**Advertising liability at end of year 2 = Beginning liability+ incurred during the year2 - paid

              = 5500+ 30000-17500

             = 18000

advertising cost incurred during year3 = ending liability+ cash paid -beginning

        = 0 + 40000-18000

         = 22000

2)Amount of advertising liability shown on balancesheet at end of year2 = Beginning liability+ incurred during the year2 - paid

              = 5500+ 30000-17500

             = 18000