Q-ITI-2 - Horngren'S Financial And Managerial Accounting

Question

Question: Total Pool Services earned \(130,000 of service revenue during 2018. Of the \)130,000 earned, the business received \(105,000 in cash. The remaining amount, \)25,000, was still owed by customers as of December 31. In addition, Total Pool Services incurred \(85,000 of expenses during the year. As of December 31, \)10,000 of the expenses still needed to be paid. In addition, Total Pool Services prepaid $5,000 cash in December 2018 for expenses incurred during the next year. 1. Determine the amount of service revenue and expenses for 2018 using a cash basis accounting system. 2. Determine the amount of service revenue and expenses for 2018 using an accrual basis accounting system.

Step-by-Step Solution

Answer

Answer   

Service revenue equals $130,000 and expenses equals $85,000

Step 1: Explanation on Accrual Basis Accounting

Under the basis accrual basis, revenues and expenses are recorded in the financial records on the basis of occurrence irrespective of receipt or payment of cash

Step 2: Explanation on Service Revenue

The total service revenue earned is $105,000, hence in this case, total revenue will be $130,000. Outstanding amount from customers will be ignored in this case. 

Step 3: Explanation on Expenses

The expenses incurred is $80,000, hence in this case, expenses will be $80,000. Unpaid expenses and prepaid expenses will be ignored in this case.