In its first year of operations, Ivanhoe Company recognized $29,800 in service revenue, $7,000 of which was on account and still outstanding at year-end. The remaining $22,800 was received in cash from customers. The company incurred operating expenses of $19,000. Of these expenses, $13,140 were paid in cash; $5,860 was still owed on account at year-end. In addition, Ivanhoe prepaid $3,150 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.

See below

Explanation:

1. Income statement (using cash basis)

Cash basis is recognized base on the cash collection or disbursement

Revenues (only cash receipts)

$22,800

Less:

Expenses paid in cash

($13,140)

Insurance paid

($3,150)

Net income

$6,510

2. Income statement (using accrual basis)

Revenues (earned)

($22,800 + $7,000)

$29,800

Less:

Expenses(incurred, insurance for next year not included

($19,000)

Net income

$10,800

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explanation:

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