1 answer

Stanley and Jones Lawn Service Company (S&J) maintains its books on a cash basis. However, the...

Question:

Stanley and Jones Lawn Service Company (S&J) maintains its books on a cash basis. However, the company recently borrowed $150,000 from a local bank, and the bank requires S&J to provide annual financial statements prepared on an accrual basis. During 2021, the following cash flows were recorded:
   

Cash collected for: Services to customers $ 370,000
Cash paid for:
Salaries $ 185,000
Supplies 30,000
Rent 14,000
Insurance 11,000
Miscellaneous 25,000 265,000
Net operating cash flow $ 105,000

  
You are able to determine the following information about accounts receivable, prepaid expenses, and accrued liabilities:

January 1, 2021 December 31, 2021
Accounts receivable $ 37,000 $ 29,500
Prepaid insurance 0 2,500
Supplies 1,500 1,750
Accrued liabilities
(for miscellaneous expenses)
2,900 3,800

  
In addition, you learn that the bank loan was dated September 30, 2021, with principal and interest at 6% due in one year. Depreciation on the company’s equipment is $15,000 for the year.
  
Required: Prepare an accrual basis income statement for 2021. (Ignore income taxes.)
  


Answers

Accrual basis income statement for 2021 is shown below:
Income statement
Sales revenue $362,500
Less: Operating expenses:
Salaries $185,000
Supplies $29,750
Rent $14,000
Insurance $9,250
Miscellaneous $25,900
Depreciation $15,000
Total operating expenses $278,900
Operating income $83,600
Less: Other expense:
Interest $2,250
Net income $81,350
Calculate sales revenue
Ending accounts receivable $29,500
Add: Cash collected $370,000
Less: Beginning accounts receivable -$37,000
Sales revenue $362,500
Calculate supplies expense
Beginning supplies $1,500
Add: Purchases $30,000
Less: Ending supplies -$1,750
Supplies expense $29,750
Calculate insurance expense
Total insurance paid $11,000
Prepaid insurance -$1,750
Insurance expense $9,250
Calculate miscellaneous expense
Miscellaneous paid $25,000
Increase in accrued liabilies $900 (3800-2900)
Miscellaneous expense $25,900
Interest expense 150000*6%*3/12
Interest expense $2,250
.

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