Question

Exercise 2-18 (Algo) Cash versus accrual accounting [LO2-9]

Stanley and Jones Lawn Service Company (S&J) maintains its books on a cash basis. However, the company recently borrowed $190,000 from a local bank, and the bank requires S&J to provide annual financial statements prepared on an accrual basis. During 2021, the following cash flows were recorded:
   

Cash collected for: Services to customers				$	410,000
Cash paid for:
Salaries	$	189,000
Supplies		34,000
Rent		18,000
Insurance		8,000
Miscellaneous		29,000			278,000
Net operating cash flow				$	132,000

  
You are able to determine the following information about accounts receivable, prepaid expenses, and accrued liabilities:

	January 1, 2021			December 31, 2021
Accounts receivable	$	30,000		$	26,000
Prepaid insurance		0			2,900
Supplies		1,900			3,000
Accrued liabilities (for miscellaneous expenses)		3,300			4,600

  
In addition, you learn that the bank loan was dated September 30, 2021, with principal and interest at 6% due in one year. Depreciation on the company’s equipment is $19,000 for the year.
  
Required:
Prepare an accrual basis income statement for 2021. (Ignore income taxes.)

Answer 1

Stanley and Jones Lawn Service Company (S&J)
Income Statement
For the year ended December 31, 2021
Revenues (26000+410000-30000)		$   406,000
Less: Expenses
Salaries expense	$   189,000
Supplies expense (1900+34000-3000)	$     32,900
Rent expenses	$     18,000
Insurance expense (8000-2900)	$       5,100
Misc. expenses	$     27,700
Depreciation expense	$     19,000
Interest expense ($190,000*6%*3/12)	$       2,850
Total expenses		$   294,550
Net income		$   111,450

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