Posted: April 6th, 2016

True or false? The cash basis of accounting is required under Generally Accepted Accounting Principles (GAAP) when preparing financial statements. Explain, if necessary?


Jake’s Computer Repair Service earned a small profit for the month of January 20×1. Jones expects the business to continue operating into the foreseeable future. In fact, he expects the business to grow so long as it continues to provide customers with excellent service.

The following transactions take place in February 20×1:

a. Feb. 1, 20×1. Jones pays off the accounts payable balance of $410 in cash.
b. Feb. 2, 20×1. Jones contracts a local advertising agency, Hype!, Inc. The agency offers to provide six months
of customized advertising and promotional services for a fee of $1,200. Jones agrees and mails a check to Hype!, Inc. for the full amount. Hint: Record a prepaid expense.
c. Feb. 24, 20×1. Jones receives a utility bill for the month of February, $490. This amount is due on March 6,
20×1, and is still payable at month end.
d. Feb. 28, 20×1. Service revenues for the month total $5,300: $3,900 cash and $1,400 on account.
e. Feb. 28, 20×1. A customer brings in a laptop for repair and a software upgrade. The customer writes a check for $120 to cover the service. Jones begins work on the laptop on March 2, 20×1.
f. Feb. 28, 20×1. Jones pays rent of $500 in cash.
g. Feb. 28, 20×1. Jones withdraws $1,000 in cash.
h. Feb. 28, 20×1. Wages are paid during the month, amounting to $900 in cash.

Requirement 1
Make the necessary entries to journalize these transactions for the month of February.

Requirement 2
On February 28, Jones takes the following facts into account:

I. Feb. 28, 20×1. The supplies account had a balance of $910 on Feb. 1, 20×1. Some supplies were used during the month. Jones determines that the original cost of the remaining supplies is $260.
j. Jones accrues an additional $30 in wages for the hours that Dave worked on Monday, February 28, 20×1; Dave’s wage for that pay period is scheduled for payment on Friday, March 4, 20×1.
k. Feb. 28, 20×1. Jones considers the prepayment made for advertising services on Feb. 2, 20×1, and makes an entry to account for advertising expense for the month of February, 20×1.
l. Feb. 28, 20×1. Interest of $1220 has accrued on the note payable. The interest is scheduled for payment early in March.

Requirement 3
Using an accounting worksheet, Jones prepares a trial balance before making adjustments. Compute the worksheet,
showing the adjustments, and compute the ending (adjusted) balance amounts. Label each adjustment in parenthesis (i) – (l).

Requirement 4
Prepare an income statement, a statement of owners’ equity, and a balance sheet for Jake’s Computer Repair Service for the months ended February 28, 20x!. Use the adjusted trial balance amounts you computed in Requirement 3, and the template below.

Requirement 5
Jones recognizes utilities expense as soon as the utilities bill arrives, and recognizes service revenues only when the related service is performed (refer back to transaction c and e in Requirement (4). Which basis of accounting is Jones correctly applying?

Requirement 6
Jones makes adjustments at month-end to assign revenues to the period in which they were earned and to assign expenses to the period in which they are incurred. As a result, revenues earned in February are reported together with the expenses incurred to generate those revenues. Which accounting principle or concept is Jones correctly applying?

Requirement 7
Adjustment entries involve revenue or expense accounts but never affect the cash account. True or False?

Requirement 8
Jones accrues interest on the note payable with an adjusting entry. Explain the effect on the income statement if Jones had failed to make this entry.

Requirement 9
True or false? The cash basis of accounting is required under Generally Accepted Accounting Principles (GAAP) when preparing financial statements. Explain, if necessary.

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