Answer:
a) $3,000 compensation to a consultant who spent three weeks in January 20x7 analyzing B’s internal control system.
- $3,000 recognized in 20x6
Cash basis accounting doesn't recognize prepaid expenses that last less than 12 months, therefore, this expense will be recognized in the year that it was paid for regardless if the actual expense took place on a later date. The same applies for rent, insurance, etc.
b) $500,000 to purchase a new piece of manufacturing equipment. The equipment was delivered on January 8, 20x7 and has a useful life of 5 years.
If you use modified cash basis accounting, you must capitalize fixed assets and depreciate them. You would recognize depreciation expense during the following 5 years.
c) $16,900 property tax to the local government for the first six months of 20x7.
- $16,900 recognized in 20x6
Since you paid your taxes in 2016, you must recognize them.
d) $50,000 for a two-year lease beginning on February 1, 20x7.
The 12 month rule doesn't apply, therefore, you must recognize rent during 20x7 and 20x8.
e) $23,700 of inventory items held for sale to customers.
Even for cash basis accounting, inventory is a permanent account in the balance sheet and it cannot be expensed until sold.
