Question

On July 21, an auto repair shop fixed a customer’s vehicle. On July 22, the mechanic billed the customer $700 for the work. The customer paid the invoice on July 27. The cost of the work was $200 for parts and $150 for employee wages. The repair shop paid for wages on Aug 3 and parts on July 30. The business has a July 31 fiscal year end. How much profit or loss would be reported in the income statement for the repair under the cash-basis and accrual-basis of accounting?

Select one:

a. cash basis, $150 profit; accrual basis, $700 profit

b. cash basis, $700 profit; accrual basis, $0 profit

c. cash basis, $700 profit; accrual basis, $700 profit

d. cash basis, $500 profit; accrual basis, $350 profit

e. cash basis, $200 loss; accrual basis, $500 profit

Answer 1

Under Accrual basis the expense and income is recorded on it's happening itself

So in July itself the income of $700 and the expense of $200 on parts and $150 on wages will be recorded

So under Accrual system it will show a Profit of $350 ($700-$200-$150)

Under cash system events are recorded only on payment or receipt basis

so July 31 end only the receipt of $700 on july 27 and the expense of $200 on parts paid on July 30 will be recorded the amount paid for wages on august will be ingnored for the year end July 31 and they will show a profit of $500 ($700-$200)

So the correct answer is option d) cash basis, $500 profit; accrual basis, $350 profit

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