Question

Mostert Music Company had the following transactions in March: Sold music lessons to customers for $12,050; received $6,650 in cash and the rest on account. Paid $700 in wages for the month. Received a $330 bill for utilities that will be paid in April. Received $4,550 from customers as deposits on music lessons to be given in April. Based on the information above, prepare a cash basis and an accrual basis income statement.

Answer 1

The cash basis income statement only shows cash received from lessons and wages paid, resulting in a net income of $5,950. The accrual basis income statement includes all lessons sold and expenses incurred, resulting in a net income of $11,020.

Step-by-step explanation:

When preparing income statements under different accounting methods, we start by analyzing the transactions provided:

• Music lessons sold for $12,050 (cash received $6,650, the rest on account).
• Wages paid $700.
• Utility bill received for $330 (to be paid in April).
• Customer deposits received for $4,550 for lessons in April.

Cash Basis Income Statement: Records transactions when cash changes hands.

• Revenue (cash received): $6,650
• Expenses (wages paid): $700
• Net Income: $6,650 - $700 = $5,950

Accrual Basis Income Statement: Records transactions when they are earned or incurred, regardless of cash movement.

• Revenue (lessons sold): $12,050
• Expenses: Wages $700 + Utilities $330 = $1,030
• Net Income: $12,050 - $1,030 = $11,020

Deposits received for April's lessons are not included in March's income statement for either basis as they are unearned revenue.

Answer 2

Under Cash Basis all transactions for which cash is exchanged whether paid or received is accounted for.

Cash Basis Income Statement

Sales Revenue = $6,650

Customer Deposits = $4,550

Total Revenue = $11,200

Less: Expenses:

Wages = ($700)

Net Income = $10,500

Under Accrual basis, the transactions are recorded as to the period they relate, and it is not necessary to exchange cash for the same.

Accrual Basis Income Statement

Sales Revenue = $12,050

Total Revenue = $12,050

Expenses

Wages = ($700)

Utilities = ($330)

Total Expenses = ($1,030)

Net Income = $11,020