Short

This problem set focuses on cash vs. accrual accounting, revenue recognition, and accounts receivables. Please submit your work in a clear and organized manner.

Part I - Cash vs. Accrual Accounting

Best Purchase is an electronics retailer. Indicate the effect of each of the following transactions on Best Purchase’s 2010 net income under cash accounting and accrual accounting, respectively. Clarification: for cash accounting show changes in the cash account; for accrual accounting show changes in the P&L.

Examples: Best Purchase provided services and received cash of $4000.

Cash basis Accrual basis

Increase $4,000 Increase $4,000

Best Purchase received a phone bill that amounts to $500. Best Purchase will pay

the bill in January.

Cash basis Accrual basis

No change Decrease $500

1. On November 12, Best Purchase sold merchandise for $14,000 for cash. The merchandise had been purchased by Best Purchase for $8,000 on a prior accounting period.

Cash basis (cash account) Accrual basis (P&L)

Increase $6,000 Increase $6,000

2. On November 15, Best Purchase placed and paid for an order for $50,000 of merchandise from one of its suppliers.

Cash basis Accrual basis

Decrease $50,000 No change

3. On November 18, Best Purchase received the merchandise ordered on the 15th.

Cash basis Accrual basis

No change No change

4. On December 15, Best Purchase paid $12,000 for a twelve month fire insurance policy that runs from December 16, 2010 to December 15, 2011. Include the effect of any adjusting entry necessary on December 31.

Cash basis Accrual basis

Decrease $12,000 Decrease $500

5. On December 20, Best Purchase made $14,000 cash sales of gift certificates, which can be applied towards the purchase of merchandise at the store. None of the gift certificates were redeemed by December 31....