Question

Read each scenario, decide whether the company is using Cash basis or Accrual basis, and then enter your answers to the questions. The Orange Lily Law Firm prepays for advertising in the local newspaper. On January 1, the law firm paid $120 for six months of advertising. Orange Lily Law Firm recorded $120 in the Prepaid Advertising account. Accrual basis If Orange Lily Law Firm had recorded their expenses using the other method, how much advertising expense would they have recorded for the two months ending February 28? Enter this value as a positive number.

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

Answer Part 1) Since on Payment for advertising expense company has debited prepaid advertising account, this shows that it is following accrual basis of accounting and will transfer to expense only the propotional share. So the correct answer is Accrual Basis Part 2) If the orange lily has used other method that is cash method instead of accrual method, then it would have to record entire $ 120 as expense for the period end febraury 28 of two months, as cash been paid in these two month only. - So the correct answer is - $ 120 .