Drysdale Company was established to manufacture conponents for the auto industry

Question

Drysdale Company was established to manufacture conponents for the auto industry. The
components are shipped the same day they are produced. The following events took place during
the first year of operations:

a. Issued common stock for $50k cash investment.
b. Purchased delivery truck at the beginning of the year at a cost of $10k cash. The truck is
expected to last five years and will be worthless at the end of that time.
c. Manufactured and sold 500,000 components the first year. The costs incured to manufacture
the components are (1) $1,000 monthly rent on a facility that included utilities and insurance, (2) $400,000
of raw materials purchased on account ($100,000 is still unpaid as of year-end, but all materials
were used in manufacturing), and (3) $190,000 paid in salaries and wages to employees and supervisors.
d. Paid $100,000 to sales and office staff for salaries and wages
e. Sold all components on account for $2 each. As of year-end, $150,000 is due from customers.

Required:
1. How much revenue will Drysdale recognize under the cash basis and under the accrual basis?
2. Describe how Drysdale should apply the matching principle to recognize expenses.
3. Prepare an Income statement under the accrual basis. Ignore income taxes.

Explanation / Answer

1.

The difference under cash accounting is that revenue is recognized when received.

2. According to the matching principle, revenues of a particular period should be matched with all the costs necessary to generate that revenue. The purchase of raw materials is a cost incurred resulting in an unexpired cost (asset, reported on the balance sheet) that is made into components (asset) which are sold, resulting in an expired cost (expense, reported on the income statement). The truck purchase is an unexpired cost (asset, reported on the balance sheet) resulting in a depreciation expense, which is an expired cost (expense, reported on the income statement). Rent is an expired cost (expense, reported on the income statement).

3.

Please excuse some of the formatting, I used excel and everything come out as a cell.

Transaction Cash In Cash Out Accounts Receivable Truck Liabilties Issue Stock $50,000 Purchase truck $10,000.00 $10,000.00 depreciate truck $2,000.00 Mfg & sell components rent $12,000.00 raw materials purchased and used $300,000.00 $100,000.00 Salaries for mfg $190,000.00 Paid sales staff $100,000.00 sold components $850,000.00 $150,000.00 Totals $900,000.00 $612,000.00 $150,000.00 $8,000.00 $100,000.00

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