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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.

    © BrainMass Inc. brainmass.com June 3, 2020, 8:56 pm ad1c9bdddf
    https://brainmass.com/business/cash-vs-accrual-accounting/harden-cash-vs-accrual-prepaid-insurance-158857

    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.

    $2.19

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