Question

Company X began operations on January 1, 2016. Company X performed services for Company Y worth $70,000. Company Y paid Company X $50,000 for services in November, 2016, and paid the remaining $20,000 in January, 2017. On December 1, 2016, Company Z paid Company X $30,000 for services to be performed in January, 2017. On January 1, 2016, Company X paid $40,000 for the next two years’ rent. In 2016, Company X also incurred a salary expense of $30,000. What was Company X’s net income (loss) under the accrual method in 2016?

Answer 1

Only income earned in 2016 by company X should be considered as revenue. Under accrual basis of accounting income is recognised irrespective of cash receipt.

$70,000 is earned by Company X in 2016 by performing services to Company Y. It is irrelevant when cash is received.

$30,000 received from Company Z relates to service which should be performed next year. The income relates to 2017 and not 2016. Hence ignored.

$40,000 is paid for 2 years.

$20,000 (ie. $40,000 / 2) is rent expense of 2016.

$30,000 is salaries expense for 2016.

Net income (loss) of Company X under accrual basis in 2016:

= $70,000 - $20,000 - $30,000

= $20,000