Question

On June 1, Royal Corp. began operating a service company with an initial cash investment by shareholders of $3,900,000. The company provided $7,500,000 of services in June and received full payment in July. Royal also incurred expenses of $3,100,000 in June that were paid in August. During June, Royal paid its shareholders cash dividends of $820,000. What was the company's income before income taxes for the two months ended July 31 under the following methods of accounting? Cash Basis Accrual Basis $4,400,000 $4,400,000 $8,300,000 $3,580,000 $7,500,000 $4,400,000 $7,500,000 $3,580,000

Answer 1

Answer:

$7,500,000 $4,400,000

Explanation:

Accrual concept requires to record the income and expenses in the period in which they are incurred rather when these get paid.

Cash basis accounting records the transaction when it gets paid.

Service Income $7,500,000

Expenses           $3,100,000

Cash Dividend   $820,000

Cash Basis

   Income Statement

For two month ended 31 July.

Service Income $7,500,000

Expenses           $0                 (Expenses been paid In August)

Net Income       ($7,500,000)

Accrual Basis

   Income Statement

For two month ended 31 July.

Service Income $7,500,000

Expenses           $3,100,000

Net Income       ($4,500,000)