Question

In Year 1, Costello Company performed work for a customer and billed the customer $14,000. In Year 2, the customer pays Costello Company for the services it rendered in Year 1. In Year 1, the company incurred $6,000 of wage expense, but it did not pay the employees until Year 2. If Costello Company uses the cash-basis of accounting, then it will report(A) revenue of $14,000 and expense of $6,000 in Year 2. (B) revenue of $14,000 in Year 1 and expense of $6,000 in Year 2. (C) no revenue or expenses in either year. (D) revenue of $14,000 and expense of $6,000 in Year 1. (E) revenue of $14,000 in in Year 2 and expense of $6,000 in Year 1

Answer 1

Answer:

(A) revenue of $14,000 and expense of $6,000 in Year 2.

Explanation:

If in Year 1, Costello Company performed work for a customer and billed the customer $14,000. and In Year 2, the customer pays Costello Company for the services it rendered in Year 1.

Again if In Year 1, the company incurred $6,000 of wage expense, but it did not pay the employees until Year 2.

If Costello Company uses the cash-basis of accounting, then it will report a revenue of $14,000 and expense of $6,000 in Year 2.

Cash basis Accounting as opposed to accrual basis accounting recognizes expenses and revenue as at when paid as opposed to when earned.

Although the revenues and expenses in the scenario relates to Year 1 and would have been recorded as income and expenses in year 1 under the normal accrual basis, since that is the year the income of $14,000 and expense of $6,000 were earned and expended respectively; that will not be case in Cash-basis because the emphasis is on cash payment and receipt. Hence the choice that the income and revenue should be accounted for in Year 2