Question

QUESTION 17 Free response question: Please answer the following questions on paper, scan the papers and upload as a single file at the end of the exam. Part II Contd. 2. ABC company maintains its records cash basis of accounting during the year and then converts them to accrual basis at the end of the year through adjusting entries. While preparing the financial statements of ACC for the year ended December 31, 2020 on accrual basis, you discover the following: a. ABC Company sublet a portion of its warehouse for a one-year period for an annual rental payment of $90,000, beginning on May 1, 2020. The tenant, XYZ company, paid the entire year's rent in advance, on May 1, 2020, which ABC recorded as a credit to Rent Revenue. b. ABC Company paid $18,000 on June 1, 2020 for a two-year insurance policy and recorded the entire amount as Insurance Expense. C ABC lent $35,000 to XYZ Company on April 1, 2020. Principal and interest at 9% will be received March 31, 2021. No accrual was recorded for the interest d. Employees are paid every Friday for the five-day week ending on that day. Salaries amount to $9,000 per week. December 31, 2020 is a Thursday Required . Prepare the adjusting entries (if any) related to parts a through d. (12 points) li. The cash basis net income reported for 2020 is $240,000. Determine the accrual basis net income for 2020. (4 points)

Answer 1

1. Adjusting Entries -

ABC Company Adjusting Entries Date Accounts Title Debit Credit Dec 31 Rent Revenue $ 30,000 Unearned Rent $ 30,000 (Being Rent revenue received but not earned) Dec 31 Prepaid Insurance $ 12,750 Insurance Expense $ 12,750 (Being Insurance expense prepaid for 17 Months) $ Dec 31 Interest Reveivable $ 2,363 Interest Revenue $ 2,363 (Being Interest income earned but accrued) Dec 31 Salaries Expense $ 7,200 Salaries Payable $ 7,200 (Being Salaries Expense incurred and Accrued)

2. Income Statement -

ABC Company Income Statement Net Income as per Cash Basis $ 240,000 Less: Incomes/ Expenses Rent Revenue Salaries Expense $ 30,000 $ 7,200 $ (37,200) Add: Expenses/ Incomes Insurance Expense Interest Revenue $ 12,750 $ 2,363 $ 15,113 Net Income as per Accrual Basis $ 217,913