Exercise 33-34 Revenue Recognition and matching Carrico Advertising Inc. perform
ID: 2386864 • Letter: E
Question
Exercise 33-34 Revenue Recognition and matchingCarrico Advertising Inc. performs advertising services for several fortune 500 companies. The following information describes Carrico’s activities during 2011.
A. At the beginning of 2011, customers owed Carrico $45,800 for advertising services performed during 2010. During 2011, Carrico performed an additional $695,100 of advertising services on account. Carrico collected $708,700 cash from customers during 2011.
B. At the beginning of 2011, Carrico had $13,350 of supplies on hand for which it owed suppliers $8,150. During 2011, Carrico purchased an additional $14,600 of supplies on credit. Carrico had $2,230 of supplies on hand at the end of 2011.
C. Carrico’s 2011 operating and interest expenses were $437,600 and $133,400, respectively.
Required:
1. Calculate Carrico’s 2011 income before taxes.
2. Calculate the amount of Carrico’s accounts receivable, supplies, and accounts payable at December 31, 2011.
3. Explain the underlying principles behind why the three accounts computed in part 2 exist.
Explanation / Answer
Carrico performed 695,100 worth of services during 2011 so thats the number you will be looking at as your sales revenue. Sales revenue - COGS = Gross Profit - other expenses - dividends = Net Income From B we can find cost of goods sold. Since supplies were only 2,230 at the end of the year and it was 13350 at the beginning of the year. We can find that Carrico used 13,350-2,230 + 14,600(Supplies Purchased) = 25,720 From C we find that Costs were 437,600 and 133,400. From this point forward we can plug in the numbers and find the answer. 695,100 - 25,720 - 437,600 - 133,400 = 98,380 is your net income since theres no dividends paid Accounts receivable we have to look at the numbers again. From A we find that Carrico performed a total amount of services equal to 45800 + 695100 = 740900 and that 708700 was collected so that means there is still 32290 left in accounts receivable. Supplies account had 2,230 as it states it in the problem. Accounts payable at the beginning of the year was at 8,150 and since it purchased 14,600 in credit that means that accounts payable increases by that much. So 8150 + 14600 = 22,750 in accounts payable. The Underlying principle is the accrual accounting exists to show when revenue and expenses are recognized instead of cash accounting which would show various inaccuracies
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