Question 1

Afternoon Dessert's Inc. reported revenue of $200,000 in its cash basis income statement for the year ended December 31, 2018. Additional information from the books:
Accounts receivable December 31, 2017 $10,000
Accounts receivable December 31, 2018 5,000
Prepaid subscription in 2018 1,000
What would Afternoon Dessert's revenue be under the accrual basis of accounting?

Accepted Answer

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Question 2

Identify the three main approaches to expense recognition under U.S. GAAP and provide examples of each. How does IFRS expense recognition principles differ?

Accepted Answer

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Question 3

Sydney & Caesar Law Firm uses the accrual basis to keep their accounting records. During 2018, they collected $460,000 from clients. On December 31, 2017 they had accounts receivable of $50,000. On December 31, 2018 they had accounts receivable of $70,000 and unearned revenue of $27,000. Using the accrual basis, how much is Sydney & Caesar Law Firm's service revenue for 2018?

Accepted Answer

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Question 4

In using fair value as a measurement for assets, a company ________.

Accepted Answer

Fair value measurement prioritizes the use of observable inputs, with level 1 inputs being the most reliable. If level 1 inputs are not available, the company should use the highest level of reliability possible, such as level 2 or level 3 inputs.

Question 5

Freddie's Fish Store maintains saltwater aquariums for office buildings in Anchorage. The following events occurred during the first two months of 2018. Determine the net income for each month using both the cash and accrual bases. For depreciable items use straight line depreciation with no salvage value.
a. In January, Freddie's purchased a new industrial vacuum for cleaning tanks - it is expected to last 5 years, and cost $5,000.
b. In January, Freddie's collected $30,000 prepayment for cleaning services to be completed during January and February.
c. In February, Freddie's signed a new client, collecting $6,000 for six months of services.
d. In February, Freddie's paid its bimonthly utility bill of $500 for two months of utilities. The bill covers the current and prior months. They are always billed this amount and are paid at the end of every two months.

Accepted Answer

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Question 6

On April 2, the salaried employees of LaSalle Company receive their paychecks representing 8 workdays in March and 2 days in April for a total gross pay of $15,000. Other expenditures paid in April include advertising from March of $500 and property taxes for the first quarter of the year of $5,700. Property taxes for the second quarter are also expected to be $5,700. The company's vehicle was repaired on April 1 for an amount of $460 to be paid May 1. What are the expenses for April under the cash accounting method and what would they be under accrual basis accounting?

Accepted Answer

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Question 7

TLR Consulting keep their accounting records using the accrual basis. During 2018, they collected $425,000 from clients. On December 31, 2017 they had accounts receivable of $61,000 and on December 31, 2018 they had accounts receivable of $46,000. Additionally, they had unearned revenues of $7,000. Using the accrual basis of accounting, what did TLR Consulting earn in service fees for 2018?

Accepted Answer

Service revenue is recognized when services are performed, regardless of when cash is received. In this case, TLR Consulting earned $425,000 in service fees during 2018, as indicated by the amount collected from clients. However, the accrual basis of accounting also considers changes in accounts receivable and unearned revenues. The decrease in accounts receivable ($61,000 - $46,000 = $15,000) indicates that TLR Consulting earned more than they collected in cash. The increase in unearned revenues ($7,000) indicates that TLR Consulting collected cash in advance for services that will be performed in the future. Therefore, the total service revenue earned for 2018 is $425,000 + $15,000 - $7,000 = $433,000.

Question 8

Angelo's charges $240 per month for catering services. In the first quarter of the year, they collected $16,800. Fifteen customers pre-paid for three months of catering beginning in January, ten customers pre-paid for two months of catering beginning in February, and five customers paid for one month of catering in March. Using the cash basis of accounting, Angelo's will recognize ________ in revenue for February and ________ using the accrual basis.

Accepted Answer

Under the cash basis, revenue is recognized when cash is received. In February, 10 customers pre-paid for two months, so $4,800 is recognized. Under the accrual basis, revenue is recognized when earned. In February, 15 customers are in their second month and 10 customers in their first month, totaling $6,000.

Question 9

Yellow Pencil Company pays Helen, a staff accountant, a $10,000 a month salary. How should the salary be recognized as an expense?

Accepted Answer

Helen's salary should be recognized as an expense in the periods in which she works, reflecting the matching principle in accounting where expenses are recorded in the same period as the revenues they help to generate.

Question 10

Krump's Pie Company reported revenue of $500,000 in its accrual basis income statement for the year ended December 31, 2018. Additional information from the books:
Accounts receivable December 31, 2017 $150,000
Accounts receivable December 31, 2018 310,000
Uncollectible accounts written off during 2018 20,000
What would Krump's revenue be under the cash basis of accounting?

Accepted Answer

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Question 11

Under the new revenue standard, what drives the measurement and timing of revenue recognition?

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Question 12

Angelo's charges $280 per month for catering services. In the first quarter of the year they collected $19,600. Fifteen customers pre-paid for three months of catering beginning in January, ten customers pre-paid for two months of catering beginning in February, and five customers paid for one month of catering in March. Using the cash basis of accounting, Angelo's will recognize ________ in revenue for March and ________ using the accrual basis.

Accepted Answer

Under the cash basis, revenue is recognized when cash is received. In March, five customers paid for one month, totaling $1,400 (5 x $280). Under the accrual basis, revenue is recognized when earned. In March, revenue from fifteen customers for March ($4,200) and ten customers for March ($2,800) and five customers for March ($1,400) is recognized, totaling $8,400.

Question 13

Materially (significantly) large amounts of supplies should be recognized as an expense under which of the following approaches?

Accepted Answer

Supplies should be recognized as an expense upon use in operations, as this reflects the matching principle in accounting, where expenses are matched with the revenues they help to generate.

Question 14

Hanker LLC uses the accrual basis to keep his accounting records. During 2018, he collected $374,000 from clients. At December 31, 2017 he had accounts receivable of $139,000. At December 31, 2018 he had accounts receivable of $164,000 and unearned revenue of $41,000. What did Hanker LLC earn in service revenue for 2018 using the accrual basis of accounting?

Accepted Answer

To calculate the service revenue earned using the accrual basis, start with the cash collected ($374,000), add the increase in accounts receivable ($164,000 - $139,000 = $25,000), and subtract the unearned revenue ($41,000). This results in $374,000 + $25,000 - $41,000 = $358,000.

Question 15

Jimmy's Jelly Company reported revenue of $250,000 in its accrual based income statement for the year ended December 31, 2018. Additional information from the books:
Accounts receivable December 31, 2017 $75,000
Accounts receivable December 31, 2018 80,000
Uncollectible accounts written off during 2018 3,000
What would Jimmy's Jelly Company's revenue be under the cash basis of accounting?

Accepted Answer

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Question 16

Axe Furniture and Accessories Inc. sold an oak custom-designed harvest table for $4,000 on July 31, 2018. The wood, labor, and overhead costs of $1,200 were incurred during the three months leading up to the sale (May, June, and July). Under the expense recognition principle, which of the following statements would be true?

Accepted Answer

The expense recognition principle, also known as the matching principle, requires that expenses be matched with the revenues they help to generate. Therefore, the costs of $1,200 should be expensed as cost of goods sold in July, the month when the revenue from the sale of the table was recognized.

Question 17

Depreciation expense is recognized over time and systematically allocated over the periods of use of the related asset. When depreciation expense is recognized, what related balance sheet line item is also impacted?

Accepted Answer

Accumulated Depreciation is the balance sheet line item that is impacted when depreciation expense is recognized, as it represents the total depreciation taken on an asset since it was acquired.

Question 18

On May 2, Johnson's Landscaping LLC paid $4,700 for repairs made to equipment during April. During May fuel costs for its machinery were $5,800 to be paid in June. Johnson's lawn mowers were depreciated for May by an amount of $1,000 using the straight-line method. What would be the company's equipment-related expenses for May under cash accounting and what would the expenses be under the accrual basis for May?

Accepted Answer

Under cash accounting, expenses are recorded when paid, so only the $4,700 paid in May is recorded. Under accrual accounting, expenses are recorded when incurred, so the $5,800 fuel cost and $1,000 depreciation are recorded, totaling $6,800.

Question 19

Freddie's Fish Store maintains saltwater aquariums for office buildings in Anchorage. The following events occurred during the first two months of 2018. For each event, determine the revenue or expense under the cash and accrual bases of accounting.
a. In January, Freddie's purchased a new industrial vacuum for cleaning tanks - it is expected to last 5 years, and cost $5,000.
b. In January, Freddie's collected $30,000 prepayment for cleaning services to be completed during January and February.
c. In February, Freddie's signed a new client, collecting $6,000 for six months of services.
d. In February, Freddie's paid its bimonthly utility bill of $500 for two months of utilities. The bill covers the current and prior months. They are always billed this amount and are paid at the end of every two months.

Accepted Answer