I am having a diffiucult time figuring out the advertising expense. I have plugged in several solutions and they are all incorrect. Listed below are several transactions that took place during the second and third years of operations for RPG Company.
Year 2 Year 3
Amounts billed to customers for services rendered $ 320,000 $ 420,000
Cash collected from credit customers 230,000 370,000
Cash disbursements:
Payment of rent 77,000 0
Salaries paid to employees for services rendered during the year 137,000 157,000
Travel and entertainment 27,000 37,000
Advertising 13,500 32,000
In addition, you learn that the company incurred advertising costs of $24,000 in year 2, owed the advertising agency $4,900 at the end of year 1, and there were no liabilities at the end of year 3. Also, there were no anticipated bad debts on receivables, and the rent payment was for a two-year period, year 2 and year 3.
Required:
1. Calculate accrual net income for both years.
2. Determine the amount due the advertising agency that would be shown as a liability on RPG’s balance sheet at the end of year 2.

RPG Company

1. Accrual Net Income for Year 2 and Year 3:

                                                                          Year 2             Year 3

Amounts billed to customers for services  $ 320,000   $ 420,000

Expenses:

Rent                                                                     38,500         0  

Salaries paid to employees for services          137,000       157,000

Travel and entertainment                                  27,000        37,000

Advertising                                                         24,000         16,600

Net Income                                                      $93,500     $170,900

2. Determination of the liability for Advertising:

Advertising Expense:

Year 1 balance = $4,900

Year 2 =            $24,000

Cash paid           (13,500)

Balance             $15,400

Explanation:

a) Data and Calculations:

RPG Company.

                                                                          Year 2             Year 3

Amounts billed to customers for services  $ 320,000   $ 420,000

Cash collected from credit customers           230,000       370,000

Cash disbursements:

Payment of rent                                                  77,000         0  

Salaries paid to employees for services          137,000       157,000

Travel and entertainment                                  27,000        37,000

Advertising                                                          13,500        32,000

                                Year 2             Year 3

Service Revenue:   $ 320,000   $ 420,000

Accounts Receivable

Service revenue  $320,000

Cash collected       230,000

Balance Year 2      $90,000

Service revenue    420,000

Cash collected      370,000

Balance Year 3     $50,000

Advertising Expense:

Year 1 balance = $4,900

Year 2 =            $24,000

Cash paid           (13,500)

Balance             $15,400

Year 3 =              16,600

Cash paid           32,000

Balance               0

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