Answered Essay: Roger Wilde is a CPA. He has numerous clients, one of which is Wedding World (WW). WW is a full service bridal c

Roger Wilde is a CPA. He has numerous clients, one of which is Wedding World (WW). WW is a full service bridal consulting firm and is interested in buying Wedding Wonders Photography Studio (WWPS). WWPS uses the cash basis of accounting. Roger has been retained to help WW acquire WWPS, and you are a staff accountant working for Roger. Begin by evaluating the following facts for June.

Revenues WWPS provides a complete wedding-day package for $2,950. The package requires a $1,000 down payment at the time the contract is signed, a $1,200 payment on the date of the wedding, and a final $750 payment 30 days after the wedding. The company uses a mobile digital processing lab and is able to deliver a complete wedding portfolio at the close of the reception on the wedding day itself! Seventy-five weddings were photographed during June. All of these events were booked in earlier months. During June, an additional 92 weddings were booked for future months. Final payments were received during June for 47 weddings performed in May. None of the June weddings resulted in the receipt of the final payment before July 1, but full payment is expected.

Expenses During June $70,000 was actually paid for wages. Accrued wages at the beginning of the month totaled $12,000. At the end of the month, $23,000 was owed to employees. At the close of June, the WWPS bought new photography equipment for $13,000. Entering June, WWPS owned equipment with a total cost of $700,000. This equipment has an average life of 50 months. Supplies on hand at the beginning of the month totaled $123,500 and $76,000 was expended for supplies during the month. Supplies on hand were $81,200 at the end of the month.

(a) Prepare a cash basis income statement for June. Preliminarily, WW is willing to pay a price equal to 75 X June’s monthly income.

(b) On further review of the facts relating to WWPS, Roger suggested that a fair offer should be based on accrual basis income. Calculate accrual basis income.

Expert Answer

 

a) cash basis income statement for the month of june:( income is recognized when cash is received and expenses are recognized when the cash is paid.)

cash receipts from 75 weddings ( except for the final payment which is received on 1st july)

1000 ( down payment) + 1200 ( on wedding date ) X 75 weddings= $165,000

cash receipts from 92 prebooked wedding:

92 wedding X $1000 down payment = $92,000

cash receipts for final oayment in june for 47 past weddings:

47 X 750= $35,250

Total cash received := 165,000+92,000+35,250= $292,250…………..(1)

expenses for the month of june 2017:

payment of wages: $70,000

payment for supplies: $76,000

purchase of equipmen= $13,000

Total expenses :$70,000+76000+13000=$159,000…………….(2)

Net cash income (1-2)

= $133,250

b) Accrual basis income; income is recognized , when it is earned , irrespective of when it is received.

expense is recognized when it incurred , not when cash is paid.

income as per accrual accouting:

income recognition form92 wedding prebooked in june

= $2950 X 92 wedding =$271,400……………(3)

expense recognition as per accrual accounting:

Wages : wages at the end+ paid during the month- wages at begining =23000+70000-12000=$81,000

Depreciation on equipement = $700,000/50 months=$14,000

supplies during the month: supplies at the end+ paid during the month- supplies at begining

=81200+76000-123500=$33,700

total expenses=81000+14000+33700=$128,700…………..(4)

net income on accrual basis – (3)-(4)= $142,700.

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