Question

Q19 On June 1, Royal Corp. began operating a service company with an initial cash investment by shareholders of $3,206,000. The company provided $7,300,000 of services in June and received full payment in July. Royal also incurred expenses of $2,903,000 in June that were paid in August. During June, Royal paid its shareholders cash dividends of $501,000. 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.	$	4,397,000		$	4,397,000
b.	$	7,603,000		$	3,896,000
c.	$	7,300,000		$	4,397,000
d.	$	7,300,000		$	3,896,000

Multiple Choice

• Option a

• Option b

• Option c

• Option d

Answer 1

Services provided in June = $7,300,000

Cash received for services in July = $ 7,300,000

Expenses incurred in June = $ 2,903,000

Expenses were paid in August

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

= $ 7,300,000

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

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

= 7,300,000 - 2,903,000

= $ 4,397,000

Correct option is C

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