Question

4. On December 1, 2017, Cream Ale Ltd. receives $1,800 in advance for an agreement to brew beer during the months of December, January, and February. As of December 31, 2017, Cream Ale Ltd: A) would have a $1,200 liability to its client under accrual accounting, and would have a $1,800 liability to its client under cash-basis accounting B) would have recognized $600 revenue under accrual accounting, and would have recognized $1,800 revenue under cash-basis accounting C) would have a $0 liability to its client under accrual accounting, and would have a $1,200 liability to its client under cash-basis accounting D) would have recognized $600 cash under accrual accounting, and would have recognized 1,800 cash under cash-basis accounting

Answer 1

Answer B) : would have recognized $600 revenue under accrual accounting and would have recognized $1800 revenue under cash-basis accounting

AS

Under accrual accounting the revenue is recognized only for the work or service which have been rendered as in present case $1800 is received for three months and on 31st December one month has completed so revenue for one month of December will be recognized as

Revenue recognized = $1800 * 1/3 = $600

Under Cash accounting the whole revenue is recognized when the cash is received irrespective to the fact that service or goods are provided or not so in present case if cash basis is followed in that case whole revenue of $1800 will be booked in December

Hence our answer is B) would have recognized $600 revenue under accrual accounting and would have recognized $1800 revenue under cash-basis accounting

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