Listed below are several transactions that took place during the second and third years of operations for RPG Consulting.
Year 2 Year 3
Amounts billed to customers for services rendered 390,000 490,000
Cash collected from credit customers 300,000 440,000
Cash disbursements:
Payment of rent 84,000 0
Salaries paid to employees for services rendered during the year 144,000 164,000
Travel and entertainment 34,000 44,000
Advertising 17,000 39,000
In addition, you learn that the company incurred advertising costs of $29,000 in year 2, owed the advertising agency $5,400 at the end of year 1, and there were no liabilities at the end of year 3. Also, there were no anticipated bad debts on receivables, and the rent payment was for a two-year period, year 2 and year 3.
Required:
1. Calculate accrual net income for both years.
2. Determine the amount due the advertising agency that would be shown as a liability on RPG’s balance sheet at the end of year 2.

Answer:

1.                                              Year 2          Year 3

Revenues                            $390,000    $490,000

Expenses

Rent                                     $42,000       $42,000

Salaries                                $144,000     $164,000

Travel and entertainment    $34,000      $44,000

Advertising                           $29,000      $21,600

Net Income                          $99,000      $260,400

2. Advertising liability at end of year 2 = $29,000 - ($17,000 - $5,400) = $29,000 - $11,600 = $17,400

Working

Advertising Expenses

Debit                            Credit

                                    Balance B/d                       5400

Bank               17000    Profit and Loss account 29000

Balance c/d 17400  

Total                34400   Total                                  34400

Advertising Expenses

Debit                     Credit

                                  Balance B/d                      17400

Bank     39000    Profit and Loss account   21600

Balance c/d  0

Total            39000    Total                                  39000

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3. A system of allocating scarce goods and services by criteria other than price:_______
4. A sudden drop in the supply of a good:_______
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7. A government-mandated minimum price that must be paid for a good or service:_________

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