Ronson Ltd prepared the following income statement using the cash basis of accounting:
Additional data:
1. Depreciation on a company motor vehicle for the year amounted to $8,000. This amount is not included in the expenses above.
2. On 1 January 2019, Ronson paid for a two-year insurance policy on the motor vehicle amounting to $1,800. The total amount is included in the expenses above.
Instructions:
(a) Recast the above income statement on the accrual basis in conformity with generally accepted accounting principles. Show computations and explain each change.
(b) Explain which basis (cash or accrual) provides a better measure of profit.

Question

Ronson Ltd prepared the following income statement using the cash basis of accounting:
  Additional data:
1. Depreciation on a company motor vehicle for the year amounted to $8,000. This amount is not included in the expenses above.
2. On 1 January 2019, Ronson paid for a two-year insurance policy on the motor vehicle amounting to $1,800. The total amount is included in the expenses above.
Instructions:
(a) Recast the above income statement on the accrual basis in conformity with generally accepted accounting principles. Show computations and explain each change.
(b) Explain which basis (cash or accrual) provides a better measure of profit.

Quizplus · Accepted Answer

The Answer of Ronson Ltd prepared the following income statement using the cash basis of accounting:
  Additional data:
1. Depreciation on a company motor vehicle for the year amounted to $8,000. This amount is not included in the expenses above.
2. On 1 January 2019, Ronson paid for a two-year insurance policy on the motor vehicle amounting to $1,800. The total amount is included in the expenses above.
Instructions:
(a) Recast the above income statement on the accrual basis in conformity with generally accepted accounting principles. Show computations and explain each change.
(b) Explain which basis (cash or accrual) provides a better measure of profit.

Ronson Ltd Prepared the Following Income Statement Using the Cash