Hal Corp Prepared the Following Income Statement Using the Cash Basis

question 165

Essay

Hal Corp. prepared the following income statement using the cash basis of accounting: $\begin{array}{c}\text { HAL CORP.}\\\text { Income Statement, Cash Basis}\\\text { For the Year Ended December 31, 2018}\\\\\begin{array}{llr}\text { Service revenue (does not include } \$ 25,000 \text { of services rendered on account }\\ \text { because the collection will not be until 2019) } &\$370,000\\ \text { Expenses (does not include \( \$ 15,000 \) of expenses on account because} &\\ \text { payment will not be made until 2019) } & \underline{220,000}\\ \text { Net income} & \underline{\$150,000}\\\end{array}\end{array}$

Additional data:
1. Depreciation on a company automobile for the year amounted to $6,000. This amount is not included in the expenses above.
2. On January 1, 2018, paid for a two-year insurance policy on the automobile amounting to $1,800. This amount is included in the expenses above.
Instructions
(a) Recast the above income statement on the accrual basis in conformity with generally accepted accounting principles. Show computations and explain each change.
(b) Explain which basis (cash or accrual) provides a better measure of income.

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Definitions:

Void

A term referring to a contract or legal agreement that is invalid or without legal effect from its inception.

Disaffirmance

In contract law, the right of a party to renounce a contract to avoid legal obligations, typically used in cases involving minors or instances of fraud.

Majority

The age at which a person is considered an adult and has the legal rights and responsibilities of an adult, or a more than half portion of a group.

False Representation

An untrue statement of fact made by one party to another, which induces the latter to enter into a contract.