Primo Industries collected $105,000 from customers in 2020. Of the amount collected, $25,000 was for services performed in 2019. In addition, Primo performed services worth $40,000 in 2020, which will not be collected until 2021. Primo Industries also paid $72,000 for expenses in 2020. Of the amount paid, $30,000 was for expenses incurred on account in 2019. In addition, Primo incurred $42,000 of expenses in 2020, which will not be paid until 2021. (a) Compute 2020 cash-basis net income. Cash-basis net income $Entry field with incorrect answer 75000 (b) Compute 2020 accrual-basis net income. Accrual-basis net income $Entry field with incorrect answer 38000

(a) $33,000

(b) $36,000

Explanation:

(a)

Cash Basis net income is based on the net cash flow of cash inflow against revenue transaction and cash outflow of expenses transaction of the business. It does not consider the accrual of income and experience in any period.

2020

Cash Collected from customers = $105,000

Payment of Expenses = $72,000

Net Income = Cash Receipts - Cash payments = $105,000 - $72,000 = $33,000

Cash Basis net income is $33,000

(b)

Accrual Concept of accounting require a business to record revenue when realized and Expenses when accrued. Accrual Basis net income is based accrual of revenue and expenses of the business. It does not matter when the payment is received or paid.

Revenue = Total Cash Receipts in 2020 - Payment for service performed in 2019 + Services performed in 2020 but not yet collected = $105,000 - $25,000 + $40,000 = $120,000

Expenses = Total Payments in 2020 - Payment of Expenses of 2019 + Expense incurred but not been paid = $72,000 - $30,000 + $42,000 = $84,000

Net Income on Accrual Basis = Revenue - Expenses = $120,000 - $84,000 = $36,000

Accrual Basis net income is $36,000

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