Question

Listed below are several transactions that took place during the second and third years of operations for RPG Company.

	Year 2			Year 3
Amounts billed to customers for services rendered	$	400,000		$	500,000
Cash collected from credit customers		310,000			450,000
Cash disbursements:
Payment of rent		85,000			0
Salaries paid to employees for services rendered during the year		145,000			165,000
Travel and entertainment		35,000			45,000
Advertising		17,500			40,000

In addition, you learn that the company incurred advertising costs of $30,000 in year 2, owed the advertising agency $5,500 at the end of year 1, and there were no liabilities at the end of year 3. Also, there were no anticipated bad debts on receivables, and the rent payment was for a two-year period, year 2 and year 3.

Required:
1. Calculate accrual net income for both years.
2. Determine the amount due the advertising agency that would be shown as a liability on RPG’s balance sheet at the end of year 2.

Answer 1

year 2 year3 $ 400,000 $ 500,000 Service revenue less;expense Rent expense (85000/2] salaries Travel and entertainment advertising $ $ $ $ (42,500) $ (145,000) $ (35,000) $ (30,000) $ (42,500) (165,000) (45,000) (22,000) net income $ 147,500 $ 225,500 **Advertising liability at end of year 2 = Beginning liability+ incurred during the year2 - paid = 5500+ 30000-17500 = 18000 advertising cost incurred during year3 = ending liability+ cash paid-beginning = 0 + 40000-18000 = 22000 2) Amount of advertising liability shown on balancesheet at end of year2 = Beginning liability+ incurred during the year2-paid = 5500+ 30000-17500 = 18000