Question

Read each scenario, decide whether the company is using Cash basis or Accrual basis, and then enter your answer to the question. The Purple Tulip Law Firm prepays for advertising in the local newspaper. On January 1, the law firm paid $1,870 for six months of advertising. Purple Tulip Law Firm recorded 51,870 in the Prepaid Advertising account Cash basis If Purple Tulip 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. 1 Safe Home provides house-sitting for people while they are away on vacation. Some of its customers pay immediately after the job is finished. Some customers ask that the business send them a bill. As of the end of the year, Safe Home has collected 51,940 from cash paying customers. Safe Home's remaining customers owe the business 51,280. Safe Home recorded 51,940 of service revenue for the year.

Answer 1

1. Accrual Basis

As the firm has put the amount in Prepaid expenses account, it will write it off according to the period of advertisement ie. months.

2. If the firm has used another method, it would have shown entire amount of $ 1870 in the period.

3. Cash Basis as the revenue is recognised only what is received in cash ie. $ 1940.