Analyzing the Effects of Transactions in T-Accounts and Computing Cash Basis versus Accrual Basis Net Income

Stacey’s Piano Rebuilding Company has been operating for one year (2010). At the start of 2011, its income statement accounts had zero balances and its balance sheet account balances were as follows:

Required:

1. Create T-accounts for the balance sheet accounts and for these additional accounts: Rebuilding

Fees Revenue, Rent Revenue, Wages Expense, and Utilities Expense. Enter the beginning balances.

2. Enter the following January 2011 transactions in the T-accounts, using the letter of each transaction as the reference:

a. Rebuilt and delivered five pianos in January to customers who paid $18,400 in cash.

b. Received a $600 deposit from a customer who wanted her piano rebuilt.

c. Rented a part of the building to a bicycle repair shop; received $820 for rent in January.

d. Received $7,200 from customers as payment on their accounts.

e. Received an electric and gas utility bill for $520 to be paid in February.

f. Ordered $960 in supplies.

g. Paid $2,140 on account in January.

h. Received from the home of Stacey Eddy, the major shareholder, a $920 tool (equipment) to use in the business.

i. Paid $15,000 in wages to employees who worked in January.

j. Declared and paid a $2,600 dividend.

k. Received and paid cash for the supplies in ( f ).

3. Using the data from the T-accounts, amounts for the following on January 31, 2011, were

Revenues $ _______ − Expenses $ _______ = Net Income $ _______

Assets $ _______ = Liabilities $ _______ + Stockholders’ Equity $ _______

4. What is net income if Stacey’s used the cash basis of accounting? Why does this differ from accrual basis net income (in requirement 3)?

Transcribed Image Text:

Accounts payable Unearned fee revenue (deposits) Note payable (long-term) Contributed capital Retained earnings $ 9,600 3,840 48,000 8,600 10,800 Cash Accounts receivable Supplies Equipment $ 6,200 30,000 1,440 9,600 7,200 26,400 Land Building