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# Harden: Cash vs Accrual; Prepaid Insurance

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In its first year of operations, Harden Co. earned \$39,000 in revenues and received \$33,000 cash from these customers. The company incurred expenses of \$22,500 but had not paid \$2,250 of them at year end.
Harden also prepaid \$3,750 cash for expenses that would be incurred the next year. Calculate
the first year's net income under both the cash basis and the accrual basis of accounting.

In the blank space beside each adjusting entry, enter the letter of the explanation A through F that most closely describes the entry:
A. To record this period's depreciation expense.
B. To record accrued salaries expense.
C. To record this period's use of a prepaid expense.
D. To record accrued interest revenue.
E. To record accrued interest expense.
F. To record the earning of previously unearned income.
______ 1. Salaries Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,280
Salaries Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,280
______ 2. Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,208
Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,208
______ 3. Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,180
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,180
______ 4. Unearned Professional Fees . . . . . . . . . . . . . . . . . . . . . 19,250
Professional Fees Earned . . . . . . . . . . . . . . . . . . . . . . 19,250
______ 5. Interest Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,300
Interest Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,300
______ 6. Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . 38,217
Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . 38,217

On March 1, 2003, a company paid a \$16,200 premium on a 36-month insurance policy for coverage beginning on that date. Refer to that policy and fill in the blanks in the following table:

Balance Sheet Insurance Asset Using Insurance Expense Using
Accrual Cash Accrual Cash
Basis Basis Basis Basis
Dec. 31, 2003 \$_______ \$_______ 2003 \$_______ \$_______
Dec. 31, 2004 _______ _______ 2004 _______ _______
Dec. 31, 2005 _______ _______ 2005 _______ _______
Dec. 31, 2006 _______ _______ 2006 _______ _______
Total \$_______ \$_______

Check 2005 insurance expense:
Accrual, \$5,400; Cash, \$0. Dec. 31, 2005,
asset: Accrual, \$900; Cash, \$0.

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#### Solution Preview

Part 1:
Harden accrual basis: 39000 - 22500 = 16,500
Harden cash basis: 33000 - (22500 - 2250) - 3750 = 9000

Part 2 ...

#### Solution Summary

The solution shows the calculation for cash basis and accrual basis income, and then answers the questions about accrual accounting. The last part about insurance includes detail calculations and narrative to explain the response.

\$2.49