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.
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?

(2 pts) Accrual Based Accounting: Deferred (unearned) revenues. Suppose that on November 29^th, 2017 a customer pays Ood Sphere, Ltd. $2,000 cash in advance for merchandise which will be delivered to the customer on December 5^th.

Record the journal entry for the original purchase of the merchandise that occurs on November 29^th, 2017.

Record the adjusting entry Ood Sphere, Ltd. should record on December 5^th to recognize sales revenue.

Suppose the cost of the merchandise sold (i.e. COGS) is $1,600. When should Ood Sphere, Ltd. record this expense? Why? Briefly explain your answer.

Answer 1

Capaldi Corp.:

Transaction	Accrual Basis	Cash Basis
Provided services to customers for $ 2,920 cash	$ 2,920	$ 2,920
Paid $6,000 cash for June Rent	-	(6,000)
Received $ 3,900 from customers for services to be provided in June.	-	3,900
Received bill from insurance company for May's monthly premium of $ 2,000.	(2,000)	-
Paid $ 600 in cash for utilities used in May	(600)	(600)
Paid workers $ 9,100 in cash for work performed in April.	-	(9,100)
Received $ 8,100 in cash from customers for services provided in April on account	-	8,100
Issued common stock for $ 10,000 in cash.	-	-
Provided services to customers for $ 5,900 on account.	5,900	-

Moving On Inc.:

Date	Account Titles	Debit	Credit
		$	$
Oct 1, 2017	Equipment	56,000
	Cash		56,000
Dec 31, 2017	Depreciation Expense ( $ 56,000 / ( 4 x 12) ) x 3	3,500
	Accumulated Depreciation : Equipment		3,500

Ending balance in Accumulated Depreciation, Dec 31, 2018 = $ 3,500 + ( $ 56,000 x 25 % ) = $ 17,500.

Net book value of equipment as on Dec 31, 2018 = $ 56,000 - $ 17,500 = $ 38,500.

Ood Sphere Ltd:

Date	Account Titles	Debit	Credit
		$	$
Nov 29, 2017	Cash	2,000
	Unearned Revenue		2,000
Dec 5, 2017	Unearned Revenue	2,000
	Sales Revenue		2,000
Dec 5, 2017	Cost of Goods Sold	1,600
	Merchandise Inventory		1,600

As per the matching principle, cost of goods sold should be matched against revenue in the period sales revenue is earned. That is the reason why COGS should be recognized on December 5 rather than on November 29.