Problem

Comparing accrual and cash-basis accounting, preparing adjusting entries, and preparing in...

Comparing accrual and cash-basis accounting, preparing adjusting entries, and preparing income statements [15-25 min]

Carolina’s Golf School, Inc., completed the following transactions during October, 2012:

Oct 1	Prepaid insurance for October through December, $900.
4	Performed services (gave golf lessons) on account, $2,400.
5	Purchased equipment on account, $1,500.
8	Paid property tax expense, $200.
11	Purchased office equipment for cash, $1,000.
19	Performed services and received cash, $700.
24	Collected $500 on account.
26	Paid account payable from October 5.
29	Paid salary expense, $1,400.
31	Recorded adjusting entry for October insurance expense (see October 1).
31	Debited unearned revenue and credited revenue in an adjusting entry, $1,100.

Requirements

1. Prepare journal entries for each transaction.
2. Using the journal entries as a guide, show whether each transaction would be handled as a revenue or an expense, using both the accrual and cash basis, by completing the following table:
3. After completing the table, calculate the amount of net income or net loss for the company under the accrual and cash basis for October.
4. Considering your results from Requirement 3, which method gives the best picture of the true earnings of Carolina’s Golf School? Why?