connect Exercises E 11 Accrual accounting Listed below are s

connect Exercises E 1-1 Accrual accounting Listed below are several transactions that took place during the first two years of operations for the law firm Pete, Pete, and Roy . LO1-2 Year 1 Year 2 Amounts billed to clients for services rendered Cash collected from clients Cash disbursements $170,000 160,000 $220,000 190,000 Salaries paid to employees for services rendered during the year Utilities 90,000 30,000 60,000 100,000 40,000 Purchase of insurance policy In addition, you learn that the firm incurred utility costs of $35,000 in year 1, that there were no liabilities at the end of year 2, no anticipated bad debts on receivables, and that the insurance policy covers a three-year period.

Solution

Answer

---Amount billed to clients is the true Revenues that has been “earned” and as per accrual accounting model, must be recognised to that period.

---Billing client leads to creation of accounts receivables.

---Cash is collected from clients and adjusted against accounts receivables.

---In Year 1, utilities cost paid = $30,000 in cash, which below instruction says that Year 1 utilities cost = $35,000. This means that $5,000 are the utilities Payable (liabilities) for year 1. In year 2, $ 40,000 is paid in cash for utilities, out of which $5000 will be against utilities payable and remaining $35000 against Year 2 utilities expenses.

---In year 1, Insurance premium is paid of $60,000 in cash which is a 3 year premium This means each year $ 20000 [60000/3] of insurance gets expire and treated as an insurance expenses.

Year 1

Year 2

Debit

Credit

Debit

Credit

1

Account receivables

$       1,70,000.00

$        2,20,000.00

Services revenue

$                 1,70,000.00

$             2,20,000.00

(amount billed to clients)

2

Cash

$       1,60,000.00

$        1,90,000.00

Account receivables

$                 1,60,000.00

$             1,90,000.00

(cash collected from clients)

3

Salaries expenses

$           90,000.00

$        1,00,000.00

Cash

$                     90,000.00

$             1,00,000.00

(cash paid for salaries)

4

Utilities expenses

$           35,000.00

$            35,000.00

Utilities payable

$                       5,000.00

$              5,000.00

Cash

$                     30,000.00

$                 40,000.00

(utilities expenses paid)

5 (i)

Prepaid Insurance

$           60,000.00

NO ENTRY

Cash

$                     60,000.00

5 (ii)

Insurance expense

$           20,000.00

$            20,000.00

Prepaid Insurance

$                     20,000.00

$                 20,000.00

(expired insurance recorded)

Year 1

Year 2

Cash Collected from clients

$       1,60,000.00

$                 1,90,000.00

Cash paid for salaries

$        (90,000.00)

$               (1,00,000.00)

Cash paid for utilities

$        (30,000.00)

$                  (40,000.00)

Cash paid for Insurance

$        (60,000.00)

Net Operating Cash Flows

$        (20,000.00)

$                     50,000.00

Year 1

Year 2

Services revenue

$             1,70,000.00

$               2,20,000.00

Expenses:

Salaries expenses

$                90,000.00

$               1,00,000.00

Utilities expenses

$                35,000.00

$                  35,000.00

Insurance expense

$                20,000.00

$                  20,000.00

Total expenses

$             1,45,000.00

$               1,55,000.00

Net Income

$                25,000.00

$                  65,000.00

Working

Year 1

Year 2

Beginning Accounts receivables

$                                -  

$                  10,000.00

Add: clients billed

$             1,70,000.00

$               2,20,000.00

Less: Cash collected

$             1,60,000.00

$               1,90,000.00

Ending Balance of Accounts receivables

$                10,000.00

$                  40,000.00

Amount of balance that firms would show in each year’s balance sheet regarding Accounts receivables are:

For Year 1: $ 10,000
For Year 2: $ 40,000

		Year 1	Year 2
		Debit	Credit	Debit	Credit
1	Account receivables	$       1,70,000.00		$        2,20,000.00
	Services revenue		$                 1,70,000.00		$             2,20,000.00
	(amount billed to clients)
2	Cash	$       1,60,000.00		$        1,90,000.00
	Account receivables		$                 1,60,000.00		$             1,90,000.00
	(cash collected from clients)
3	Salaries expenses	$           90,000.00		$        1,00,000.00
	Cash		$                     90,000.00		$             1,00,000.00
	(cash paid for salaries)
4	Utilities expenses	$           35,000.00		$            35,000.00
	Utilities payable		$                       5,000.00	$              5,000.00
	Cash		$                     30,000.00		$                 40,000.00
	(utilities expenses paid)
5 (i)	Prepaid Insurance	$           60,000.00		NO ENTRY
	Cash		$                     60,000.00
5 (ii)	Insurance expense	$           20,000.00		$            20,000.00
	Prepaid Insurance		$                     20,000.00		$                 20,000.00
	(expired insurance recorded)