Question

In its first year of operations, Grace Company reports the following: Earned revenues of $60,000 ($52,000 cash received from customers); Incurred expenses of $35,000 ($31,000 cash paid toward them); Prepaid $8,000 cash for costs that will not be expensed until next year. Net income under the accrual basis of accounting is __________?
A) $17,000.
B) $13,000
C) $21,000.
D) $25,000.
E) None of these options are correct

Answer 1

Answer:

D) $25,000

Explanation:

Accrual basis is a method of recording accounting transactions for revenue when earned (rather than when the cash is received) and expenses matched with revenues when incurred (rather than at the time when expenses are paid).

In the year, Grace Company earned revenues: $60,000

Expense incurred: $35,000

Prepaid $8,000 that will be expense next year.

Net Income = Earned revenues - Expense incurred = $60,000-$35,000 = $25,000