Question

On June 1, Royal Corp. began operating a service company with an initial cash investment by shareholders of $3,721,000. The company provided $7,500,000 of services in June and received full payment in July. Royal also incurred expenses of $2,774,000 in June that were paid in August. During June, Royal paid its shareholders cash dividends of $578,000. What was the company's income before income taxes for the two months ended July 31 under the following methods of accounting? a. b. Cash Basis $4,726,000 $8,447,000 $7,500,000 $7,500,000 Accrual Basis $4,726,000 $4,148,000 $4,726,000 $4,148,000 C. Multiple Choice Option a ㅇ O Option b Optionc O o Option d

Answer 1

Under cash basis of accounting, the net income is calculated as cash receipts minus the cash expenditures

Cash receipts = 7500000

Cash expense = 0 (since the payment is made after July 31) hence no expense to e recognized

Net income under cash basis = 7500000 - 0 = 7500000

Under accrual basis of accounting, the net income is calculated on the basis of accrued income and expens

Sales = 7500000 (since services are provided)

Expense = 2774000 (since expense are incurred)

Net income = 7500000 - 2774000

= 4726000