Question

Primo Industries collected $105,000 from customers in 2022. Of the amount collected, $25,000 was for services performed in 2021. In addition, Primo performed services worth $40,000 in 2022, which will not be collected until 2023. Primo Industries also paid $72,000 for expenses in 2022. Of the amount paid, $30,000 was for expenses incurred on account in 2021. In addition, Primo incurred $42,000 of expenses in 2022, which will not be paid until 2023.
Required:
a. Compute 2022 cash-basis net income.
b. Compute 2022 accrual-basis net income.

Answer 1

Answer:

a.

Net Income for 2022 = $33000

b.

Net Income for 2022 = $36000

Explanation:

a.

The cash basis accounting follows that all the transactions should be recorded in the period in which cash is either received or paid out as a result of that transaction rather than in the period to which they relate to.

Thus, the Net Income for 2022 under cash basis will be,

Cash Receipts in 2022

Collections from customer           105000

Less: Cash Payments in 2020

Expenses paid                                (72000)

Net Income                                     33000

b.

Under accrual basis, the transactions should be recorded in the period to which they relate to rather than in the period when cash is received or paid out.

Thus, net income for 2022 under accrual basis will be,

Revenue 2022 = 105000 - 25000 + 40000   = $120000

Expenses 2022 = 72000 - 30000 + 42000   = $84000

Net Income = 120000 - 84000  =  $36000