Question

Listed below are several transactions that took place during the second and third years of operations for the RPG Company. Year 2 Year 3 Amounts billed to customers for services $350,000 $450,000 Cash collected from credit customers 260,000 400,000 Cash disbursements Payment of rent 80,000 0 Salaries paid to employees for services rendered during the year 140,000 160,000 Travel and entertainment 30,000 40,000 Advertising 15,000 35,000 In addition, you learn that the company incurred advertising costs of $25,000 in year 2, owed the advertising agency $5,000 at the end of year 1, and there were no liabilities at the end of year 3. Also, there were no anticipated bad debts on receivables, and the rent payment was for a two-year period, year 2 and year 3. Required: 1. Calculate accrual net income for both years. 2. Determine the amount due the advertising agency that would be shown as a liability on RPG’s balance sheet at the end of the year2.

Answer 1

Answer:

1. Net income

For Year 2 = $115,000

For Year 3 = $190,000

2. The amount which is due to the advertising agency is $20,000

Explanation:

1. The computation of the net income for year 2 and year 3 is shown below:

For Year 2 = Amounts billed to customers for services - Payment of rent - Salaries paid to employees for services rendered during the year - Travel and entertainment - advertising expense

= $350,000 - $40,000 - $140,000 - $30,000 - $25,000

= $115,000

For Year 3 = Amounts billed to customers for services - Payment of rent - Salaries paid to employees for services rendered during the year - Travel and entertainment

= $450,000 - $40,000 - $160,000 - $40,000 - $20,000

= $190,000

The rent payment is for the 2 years so the amount is divided equally.

And, the advertising expenditure is $25,000 for the year 2 and $20,000 for the year 3 ($25,000 - $5000)

2. The computation of the amount which is due to the advertising agency is shown below:

Advertising agency owed at the end of the year 1 $5,000

Advertising cost at the end of year 2 $25,000

Total amount = $30,000

Less: advertising expense paid in the year 2 ($15,000)

Less: advertising expense paid in the year 2 ($35,000)

The amount which is due to the advertising agency = $20,000