Question

McGinnis Construction is a cash-basis company with a fiscal year-end of June 30. McGinnis’ employees earn a normal weekly wage of $12,500 during a five-day work week. June 30 falls on a Thursday for the current year. McGinnis also performed services of $40,900 during the last four days of June, but they are not paid in full until July 8. As a result of operations, there will be an ________ of McGinnis’ net income for the most recent fiscal year of ________.
A. overstatement; $10,000.
B. understatement; $30,900.
C. overstatement; $30,900.
D. understatement; $40,900.

Answer 1

Answer:

correct option is B. understatement; $30,900

Explanation:

given data

normal weekly wage = $12,500

work = 5 day week

performed services = $40,900

solution

as here net income under cash basis will be nil

because here  cash not receive till the July 8,

and here cash is paid to employee on July 1 which is Friday

so net income under an  accrual basis for June month

and here revenue not yet received is $40,900  

and salaries payable for last four days of June month will be as

salaries payable  =   $12500* \frac{4}{5}$  

salaries payable  = $10000

so Net income as per accrual basis will be

Net income = $40,900   - $10000

Net income = $30,900

so here income under cash basis is understated

so correct option is B. understatement; $30,900