Chapter 1, Problem 1.2E

Accrual accounting

• LO1–2

Listed below are several transactions that took place during the second and third years of operations for the RPG Company.

	Year 2	Year 3
Amounts billed to customers for services rendered	$350,000	$450,000
Cash collected from credit customers	260,000	400,000
Cash disbursements:
Payment of rent	80,000	–0–
Salaries paid to employees for services rendered during the year	140,000	160,000
Travel and entertainment	30,000	40,000
Advertising	15,000	35,000

In addition, you learn that the company incurred advertising costs of $25,000 in year 2, owed the advertising agency $5,000 at the end of year 1, and there were no liabilities at the end of year 3. Also, there were no anticipated bad debts on receivables, and the rent payment was for a two-year period, year 2 and year 3.

Required:

1. Calculate accrual net income for both years.

2. Determine the amount due the advertising agency that would be shown as a liability on RPG’s balance sheet at the end of year 2.