Question

On June 1, Barney Corporation began operating a service company with an initial cash investment by shareholders of $3,412,000. The company provided $7,700,000 of services in June and received full payment in July. Barney also incurred expenses of $2,903,000 in June that were paid in August. During June, Barney paid its shareholders cash dividends of $490,000. What was the company's income before income taxes for the two months ended July 31 under the following methods of accounting?

	Cash Basis			Accrual Basis
a.	$	4,797,000		$	4,797,000
b.	$	8,209,000		$	4,307,000
c.	$	7,700,000		$	4,797,000
d.	$	7,700,000		$	4,307,000

Multiple Choice

• Option a

• Option b

• Option c

• Option d

Answer 1

Answer : Option C

Explanation :

Given,

Services provided in June = $7,700,000

Cash received for services in July = $ 7,700,000

Expenses incurred in June = $ 2,903,000

Expenses were paid in August

Step 1 :

Income before Income Tax under cash basis = Cash received for services in July

= $ 7,700,000

Since no payment was made for expenses in June or July, Hence no expenses will be deducted from cash receipts under cash basis

Step 2 :

Income before Income Taxes under Accrual Basis = Services provided in June - Expenses incurred in June

= 7,700,000 - 2,903,000

= $ 4,797,000