Ch. 2 n operating a service company with an initial cash investment by sharehold
ID: 2611106 • Letter: C
Question
Ch. 2 n operating a service company with an initial cash investment by shareholders of $3,618,000. The company provided $8,000,000 of services in June and received full payment in July Royal also incurred expenses of $2,774,000 in June that were During June, Royal paid its shareholders cash dividends of $490,000. What was the company's income before income taxes for the two months ended July 31 under the following methods of accounting? crual Basi 023855a $5,226,e00 b· $8,844,000 c. $8,000,000 d. $8,800,000 $4,736,00e $5,226,000 $4,736,88e Multiple Choice Option a ^Explanation / Answer
Answer = Option C
We have to calculate Net Income before tax for 2 months ended July 31 i.e. For June and July, so that means Income = Revenue – Expenses
As Dividend is deducted after deducting Tax from Income.
Cash basis
In cash basis, we will consider Revenue which is received in June and July and will consider Expenses which are paid in June and July.
Revenue is earned in June and received in July, so we will consider whole $8,000,000 as revenue.
Expenses are incurred in June but are paid in August, so they are not paid in June or July, so expenses will not be considered as expenses in these two months as they are not paid in cash.
SO
Income = Revenue – Expenses
= $8,000,000 – 0
Income under Cash basis = $8,000,000
Accrual basis
In Accrual basis, we will consider Revenue which is earned in June and July and will consider Expenses which are incurred in June and July. There is nothing that it is received or not.
Revenue is earned in June, so we will consider whole $8,000,000 as revenue.
Expenses are incurred in June, so expenses will be considered as expenses as it is irrelevant that expenses are paid or not, so we will consider $2,774,000 as expense
SO
Income = Revenue – Expenses
= $8,000,000 – $2,774,000
Income under Accrual basis = $5,226,000