Question

2. ABC company maintains its records cash basis of accounting during the year and converts them to accrual basis at the end of the year through adjusting entries. Whe preparing the financial statements of ACC for the year ended December 31, 2019 on accrual basis, you discover the following: a. ABC Company sublet a portion of its warehouse for a one-year period for an annual rental payment of $72,000, beginning on August 1, 2019. The tenant, XYZ company paid the entire year's rent in advance, on August 1, 2019, which ABC recorded as a credit to Rent Revenue. b. ABC Company paid $24,000 on May 1, 2019 for a two-year insurance policy and recorded the entire amount as Insurance Expense. Required i. Prepare the adjusting entries (if any) related to parts a and b. (6 points) The cash basis net income reported for 2019 is $180,000. Determine the accrual basis met income for 2019. (3 points)

Answer 1

1). Adjusting entries as on Dec 31, are as follows:-

Credit Debit 42,000.00 $ $ 42,000.00 Account Titles a). Rent Revenue Unearned rent revenue (Only revenue of 5 months will be considered while payment of balance 7 months to be transferred to Unearned Revenue) ($72,000 * 7/12 = $42,000) $ 16,000.00 $ 16,000.00 b). Prepaid Insurance Insurance expense (Insurance expense of only 8 months will be considered while balance amount of 16 months transferred to prepaid insurance) ($24,000 * 16/24 = $16,000)

2). Calculation of accrual basis net income;

Income as per cash basis = $180,000
Less: Revenue transferred to Unearned revenue = $42,000
Add: Insurance expense transferred to Prepaid Insurance = $16,000
Income as per Accrual basis = $154,000