Question

Stanley and Jones Lawn Service Company (S&J) maintains its books on a cash basis. However, the company recently borrowed $150,000 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				$	370,000
Cash paid for:
Salaries	$	185,000
Supplies		30,000
Rent		14,000
Insurance		11,000
Miscellaneous		25,000			265,000
Net operating cash flow				$	105,000

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

	January 1, 2021			December 31, 2021
Accounts receivable	$	37,000		$	29,500
Prepaid insurance		0			2,500
Supplies		1,500			1,750
Accrued liabilities (for miscellaneous expenses)		2,900			3,800

  
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 $15,000 for the year.
  
Required:
Prepare an accrual basis income statement for 2021. (Ignore income taxes.)
  

Answer 1

Accrual basis income statement for 2021 is shown below:
Income statement
Sales revenue		$362,500
Less: Operating expenses:
Salaries	$185,000
Supplies	$29,750
Rent	$14,000
Insurance	$9,250
Miscellaneous	$25,900
Depreciation	$15,000
Total operating expenses		$278,900
Operating income		$83,600
Less: Other expense:
Interest		$2,250
Net income		$81,350
Calculate sales revenue
Ending accounts receivable	$29,500
Add: Cash collected	$370,000
Less: Beginning accounts receivable	-$37,000
Sales revenue	$362,500
Calculate supplies expense
Beginning supplies	$1,500
Add: Purchases	$30,000
Less: Ending supplies	-$1,750
Supplies expense	$29,750
Calculate insurance expense
Total insurance paid	$11,000
Prepaid insurance	-$1,750
Insurance expense	$9,250
Calculate miscellaneous expense
Miscellaneous paid	$25,000
Increase in accrued liabilies	$900	(3800-2900)
Miscellaneous expense	$25,900
Interest expense	150000*6%*3/12
Interest expense	$2,250