Question

The Pink Peonies Law Firm prepays for advertising in the local newspaper. On January​ 1, the law firm paid $ 3 comma 000 for 10 months of advertising. How much advertising expense should Pink Peonies Law Firm record for the two months ending February 28 under the a. cash​ basis? b. accrual​ basis?

Answer 1

Answer:

(a) Total amount paid -$3000 will be recognized immediately as an expense.

(b) Only two month advertising expenses will be recognized as expense  i.e $600 while  the balance will be recorded as prepayment under current asset.

Explanation:

Monthly advertising expenses = 3,000/10

                                                   = $300

(a) Under Cash basis, the total amount paid in advance (i.e $3000) will be recognized as being expenses immediately.

(b) Under accrual basis, only two month advertising expenses already consumed will be recognized as an expense immediately while the remaining 8 months balance yet to be utilized ( $2400) will be  accounted for as prepayment under current asset in the statement of financial position (i.e it will be deferred)

Answer 2

Answer:

On Cash basis, $ 3,000 would have been recorded for the two months ending  February 28.

On accrual basis, $600 will be recognized as advertising expense for the two months ending  February 28.

Explanation:

Basically, there are two ways of recognizing transactions. These are cash basis and accrual basis. Under the cash basis transactions are recognized as on the payment of cash for expenses and the receipt of cash for revenue. On the other hand, the accrual concept requires that expense are recognized in the period incurred irrespective of whether cash was paid or not. It also requires that revenue be recognized as soon as the goods or service has been delivered irrespective of whether cash has been received or not.

As such, for the law firm that paid $ 3,000 for 10 months of advertising on January 1,

On Cash basis, $ 3,000 would have been recorded for the two months ending  February 28.

On accrual basis, the monthly expense is $3000/10 = $300

This will amount to $600 for 2 months hence $600 will be recognized as advertising expense for the two months ending  February 28.