In its first year of operations, Oriole Company recognized $30,000 in service revenue, $8,000 of which was on account and still outstanding at year-end. The remaining $22,000 was received in cash from customers. The company incurred operating expenses of $20,400. Of these expenses, $13,990 were paid in cash; $6,410 was still owed on account at year-end. In addition, Oriole prepaid $2,710 for insurance coverage that would not be used until the second year of operations.(a) Calculate the first year’s net earnings under the cash basis of accounting, and the first year’s net earnings under the accrual basis of accounting.

Revenue                      $22,000

Operating expenses  ($13,990)

Insurance expense*    ($2,710)

operating income         $5,300

*under the 12 month rule, any prepaid expenses made by cash basis taxpayers will be recognized during the period that they were paid if the expenses will be accrued in 12 months or less. In this case, the insurance expense will be accrued during year 2, which is 12 months or less.

Revenue                       $30,000

Operating expenses  ($20,400)

operating income          $9,600

Accrual basis accounting recognizes revenues and expenses when they actually occur and not necessarily when they are collected or paid.

a

explanation:

answer; closing the loop;