Question

Sweet Catering completed the following selected transactions during May 2016: May 1: Prepaid rent for three months, $1,800 May 5: Received and paid electricity bill, $100 May 9: Received cash for meals served to customers, $3,890 May 14: Paid cash for kitchen equipment, $3,950 May 23: Served a banquet on account, $2,180 May 31: Made the adjusting entry for rent (from May 1). May 31: Accrued salary expense, $490 May 31: Recorded depreciation for May on kitchen equipment, $400 If Sweet Catering had recorded transactions using the Cash method, how much net income (loss) would they have recorded for the month of May

Answer 1

pure cash basis

revenue: $3,890

expenses:

• rent $1,800
• utilities $100
• equipment $3,950

net income = -$1,950

modified cash basis

revenue: $3,890

expenses:

• rent $1,800
• utilities $100
• depreciation $400

net income = $1,590

modified cash basis considers depreciation expense for assets that have a useful life of over 12 months. I guess that the equipment purchased has a useful life of more than one year.