Q. 1SE-b - Horngren'S Financial And Managerial Accounting

Question

The Pink Peonies Law Firm prepays for advertising in the local newspaper. On January 1, the law firm paid $3,000 for 10 months of advertising. How much advertising expense should Pink Peonies Law Firm record for the two months ending February 28 under the a. cash basis? b. accrual basis?

Step-by-Step Solution

Answer

Advertising expense equals $600. 

Explanation on Accrual Basis Accounting

Accrual basis accounting records the revenues and expenses on the basis of ocuurence. 

Calculation of Advertising Expense

As on February 28, advertising expense is incurred for two months expired (January and February) only, hence advertisement expense will be recognized for two months only.

Advertising expense is calculated as follows:  

$$\begin{gathered} \mathbf{advertising}\mathbf{ }\mathbf{expense}\mathbf{ }\mathbf{=}\mathbf{ }\mathbf{amount}\mathbf{ }\mathbf{paid}\mathbf{ }\mathbf{\times }\mathbf{ }\frac{\mathbf{no}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{months}\mathbf{ }\mathbf{expired}\mathbf{ }}{\mathbf{months}\mathbf{ }\mathbf{per}\mathbf{ }\mathbf{year}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\mathbf{ }\mathbf{\times }\mathbf{ }\frac{\mathbf{2}}{\mathbf{10}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{600} \end{gathered}$$