Q18E - Intermediate Accounting (Kieso)

Question

(L07) (Cash to Accrual Basis) Jill Accardo, M.D., maintains the accounting records of Accardo Clinic on a cash basis. During 2017, Dr. Accardo collected \(142,000 from her patients and paid \)55,470 in expenses. At January 1, 2017, and December 31, 2017, she had accounts receivable, unearned service revenue, accrued expenses, and prepaid expenses as follows. (All long-lived assets are rented.)

                                                                January 1, 2017 ,          December 31,2017

Account receivable                                     \(9,250                               \)15,927

Unearned service revenue                        \(2,840                               \)4,111

Accrued expenses                                      \(3,435                               \)2,108

Prepaid expenses                                       \(1,917                                 \)3,232

 

Instructions:

Prepare a schedule that converts Dr. Accardo’s “excess of cash collected over cash disbursed” for the year 2017 to net income on an accrual basis for the year 2017.

Step-by-Step Solution

Answer

Revenue on an Accrual Basis is $148,006

Expenses on an Accrual Basis are $52,828

Net income on an Accrual Basis is $95,178

Step 1: Meaning of Income Statement

The income statement is one of the company’s core financial statements that shows the company’s profit and loss over a period of time. The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities.

Step 2: Conversion of Income Statement

Jill Accardo, M.D. Conversion of Income Statement Data from Cash Basis to Accrual Basis for the year 2017
	Cash Basis	Adjustments	Accrual Basis
Add	Deduct
Collection from customers:	$ 142,600			$ 142,600
Less: Accounts receivable, Jan 1			$ 9,250	$(9,250)
Add: Accounts receivable, Dec31		$15,927		$15,927
Add: Unearned service revenue, Jan 1		$ 2,840		$2,840
Less: Unearned service revenue Dec31			$ 4,111	$ (4,111)
Service Revenue	$ 142,600	$18,767	$ 13,361	$ 148,006
Disbursement for expenses:	$55,470			$ 55,470
Less: Accrued expense, Jan1			$3,435	$(3,435)
Add: Accrued expenses, Dec31		$ 2,108		$ 2,108
Add: Prepaid expenses, Jan1		$1,917		$ 1,917
Less: Prepaid expenses Dec31			$3,232	$ (3,232)
Operating Expenses	$ 55,470	$ 4,025	$ 6,667	$52,828
Net Income – Cash Basis	$ 87,130
Net Income- Accrual Basis				$ 95,178

Step 3: Supporting calculations

 

Conversion of Cash Revenue to Accrual Revenue:
Cash receipts from customers	$ 142,600
Less: Beginning accounts receivable	$ (9,250)
Add: Ending accounts receivable	$ 15,927
Add: Beginning Unearned revenue	$ 2,840
Less: Ending Unearned revenue	$ (4,111)
Revenue on the Accrual basis	$ 148,006

 

 

Conversion of Cash expenses to Accrual expenses:
Cash paid to operating expenses	$ 55,470
Less: Beginning accrual expenses	$ (3,435)
Add: Ending accrual expenses	$ 2,108
Add: Beginning prepaid expenses	$ 1,917
Less: Ending Prepaid Expenses	$ (3,232)
Expenses on the Accrual Basis	$ 52,828