(Cash and Accrual Basis) On January 1, 2017, Norma Smith and Grant Wood formed a computer sales andservice company in Soapsville, Arkansas, by investing $90,000 cash. The new company, Arkansas Sales and Service, has the following transactions during January. 1. Pays $6,000 in advance for 3 months’ rent of office, showroom, and repair space. 2. Purchases 40 personal computers at a cost of $1,500 each, 6 graphics computers at a cost of $2,500 each, and 25 printers ata cost of $300 each, paying cash upon delivery. 3. Sales, repair, and office employees earn $12,600 in salaries and wages during January, of which $3,000 was still payable at the end of January. 4. Sells 30 personal computers at $2,550 each, 4 graphics computers for $3,600 each, and 15 printers for $500 each; $75,000 is received in cash in January, and $23,400 is sold on a deferred payment basis. 5. Other operating expenses of $8,400 are incurred and paid for during January; $2,000 of incurred expenses are payable at January 31. Instructions(a) Using the transaction data above, prepare (1) a cash-basis income statement and (2) an accrual-basis income statementfor the month of January.(b) Using the transaction data above, prepare (1) a cash-basis balance sheet and (2) an accrual-basis balance sheet as ofJanuary 31, 2017.(c) Identify the items in the cash-basis financial statements that make cash-basis accounting inconsistent with the theoryunderlying the elements of financial statements.
(Cash and Accrual Basis) On January 1, 2017, Norma Smith and Grant Wood formed a computer sales and
service company in Soapsville, Arkansas, by investing $90,000 cash. The new company, Arkansas Sales and Service, has the following transactions during January.
1. Pays $6,000 in advance for 3 months’ rent of office, showroom, and repair space.
2. Purchases 40 personal computers at a cost of $1,500 each, 6 graphics computers at a cost of $2,500 each, and 25 printers at
a cost of $300 each, paying cash upon delivery.
3. Sales, repair, and office employees earn $12,600 in salaries and wages during January, of which $3,000 was still payable at the end of January.
4. Sells 30 personal computers at $2,550 each, 4 graphics computers for $3,600 each, and 15 printers for $500 each; $75,000 is received in cash in January, and $23,400 is sold on a deferred payment basis.
5. Other operating expenses of $8,400 are incurred and paid for during January; $2,000 of incurred expenses are payable at January 31.
Instructions
(a) Using the transaction data above, prepare (1) a cash-basis income statement and (2) an accrual-basis income statement
for the month of January.
(b) Using the transaction data above, prepare (1) a cash-basis balance sheet and (2) an accrual-basis balance sheet as of
January 31, 2017.
(c) Identify the items in the cash-basis financial statements that make cash-basis accounting inconsistent with the theory
underlying the elements of financial statements.
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