In P4.6A, cash receipts and payments were given for Creative Designs Ltd. and converted to an accrual basis.

In P4.6A,

Near the end of its first year of operations, December 31, 2018, Creative Designs Ltd. approached the local bank for a $20,000 loan and was asked to submit financial statements prepared on an accrual basis. Although the company kept no formal accounting records, it did maintain a record of cash receipts and payments. The following information is available for the year ended December 31:

Additional information:
1. Fees from design work earned but not yet collected amounted to $2,400.
2. The equipment was purchased at the beginning of January and has an estimated six-year useful life. The company uses straight-line depreciation.
3. Supplies on hand on December 31 were $1,260.
4. Rent payments included a $1,500 per month rental fee and a $2,000 deposit that is refundable at the end of the two-year lease. (Hint: Use the Prepaid Rent account for the refundable deposit.)
5. The insurance was purchased on February 1 for a one-year period expiring January 31, 2019.
6. Salaries earned for the last four days in December and to be paid in January 2019 amounted to $3,050.
7. At year end, it was determined that an additional $7,000 is owed for income tax.
Instructions
(a) Calculate total revenue, total expense, and net income that would be reported if Creative Designs used the cash basis of accounting.
(b) Compare the cash-based net income calculated in part (a) with the accrual-based net income calculated in P4.6A part (b) (1).
(c) Which method do you recommend Creative Designs use and why?
Prepare and post adjusting entries; prepare adjusted trial balance.

Transcribed Image Text:

Cash Receipts Cash Payments Issue of common shares Fees earned Equipment Supplies Rent Insurance Income tax Advertising Salaries Dividends declared S 20,0oo 巧7500 $ 35,400 8,600 20,00O 3,840 6,000 6,80o 59,800 10.000 $150,440 $177.6oo