Question

Hart, Attorney at Law, experienced the following transactions in Year 1, the first year of operations: Accepted $18,800 on April 1, Year 1, as a retainer for services to be performed evenly over the next 12 months. Performed legal services for cash of $62,000. Purchased $1,100 of office supplies on account. Paid $990 of the amount due on accounts payable. Paid a cash dividend to the stockholders of $5,900. Paid cash for operating expenses of $18,300. Determined that at the end of the accounting period $135 of office supplies remained on hand. On December 31, Year 1, recognized the revenue that had been earned for services performed in accordance with Transaction 1.

Answer 1

Answer:

 $76,100  

Explanation:

This calculation is based on the recognition principle of accrual accounting which sates that revenues must recognized when they are earned and expenses accounted for when they are incurred no matter when cash is received or paid.

Therefore, only 9 months (i.e. April 1 - December 31 = 9 months) of the retainer will be recognized or used in the calculation of total revenue as follows:

1. Monthly retainer for services = $18,800 ÷ 12 = $1,566.67  

2. Year 1 service retainer (April 1 - December 31) = $1,566.67 × 9 months

                                                                                = $14,100

3. Total revenue = Year 1 service retainer + Legal services

                            = $14,100 + $62,000

                            = $76,100

Note:

Other details are expenses and net profit appropriation which are only relevant for calculating the net profit and retained profit. These are however beyond the scope of the question.