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Read each scenario, decide whether the company is using Cash basis or Accrual basis, and then enter your answer to the question.
The Purple Tulip Law Firm prepays for advertising in the local newspaper. On January 1, the law firm paid $790 for six months of advertising. Purple Tulip Law Firm recorded $790 in the Prepaid Advertising account.
If Purple Tulip Law Firm had recorded their expenses using the other method, how much advertising expense would they have recorded for the two months ending February 28?
Sweet Catering completed the following selected transactions during May 2016:
May 1: Prepaid rent for three months, $2,100
May 5: Received and paid electricity bill, $90
May 9: Received cash for meals served to customers, $2,520
May 14: Paid cash for kitchen equipment, $3,770
May 23: Served a banquet on account, $1,900
May 31: Made the adjusting entry for rent (from May 1).
May 31: Accrued salary expense, $2,290
May 31: Recorded depreciation for May on kitchen equipment, $560 If Sweet Catering had recorded transactions using the Cash method, how much net income (loss) would they have recorded for the month of May?
If Sweet Catering had recorded transactions using the Accrual method, how much net income (loss) would they have recorded for the month of May?

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Answer:

1. Cash Basis $790

Accrual basis $263

2. Cash method $(3,440)

Accrual method $780

Explanation:

1. Calculation to determine how much advertising expense would they have recorded for the two months ending February 28

UNDER THE CASH BASIS, the Law Firm will record ​$790 of advertising expense for the two months ending February 28.

UNDER THE ACCRUAL BASIS, the Law Firm will record ​$263 ($790/6*2) of advertising expense for the two months ending February 28.

Therefore the amount of advertising expense l would they have recorded for the two months ending February 28 is:

Cash Basis $790

Accrual basis $263

2a. Calculation to determine how much net income (loss) would they have recorded for the month of May If Sweet Catering had recorded transactions using the Cash method

Using this formula

Net income (loss) using cash method = Meals served to customer – Rent paid – Electricity bill – Cash paid for kitchen equipment

Let plug in the formula

Net income (loss) using cash method= $2,520 -$2,100-$90-$3,770

Net income (loss) using cash method= $(3,440)

Therefore If Sweet Catering had recorded transactions using the Cash method, how much net income (loss) would they have recorded for the month of May is $(3,440)

2b. Calculation to determine how much net income (loss) would they have recorded for the month of May If Sweet Catering had recorded transactions using the Accrual method

Using this formula

Net income (loss) using accrual method = Meals served to customer+ Served a banquet on account – Rent expense – Electricity bill – Salary expense – Depreciation

Let plug in the formula

Net income (loss) using accrual method= $2,520+$1,900-($2,100/3)-$90-$2,290-$560

Net income (loss) using accrual method=$2,520+$1,900-$700-$90-$2,290-$560

Net income (loss) using accrual method=$780

Therefore If Sweet Catering had recorded transactions using the Accrual method, how much net income (loss) would they have recorded for the month of May is $780