Sweet Catering completed the following selected transactions during May 2016:

Question

May 1: Prepaid rent for three months, $2,100
May 5: Received and paid electricity bill, $100
May 9: Received cash for meals served to customers, $2,800
May 14: Paid cash for kitchen equipment, $3,500
May 23: Served a banquet on account, $2,800
May 31: Made the adjusting entry for rent (from May 1).
May 31: Accrued salary expense, $2,390
May 31: Recorded depreciation for May on kitchen equipment, $100

If Sweet Catering had recorded transactions using the Cash method, how much net income (loss) would they have recorded for the month of May? If there is a loss, enter it with parentheses or a negative sign.

If Sweet Catering had recorded transactions using the Accrual method, how much net income (loss) would they have recorded for the month of May? If there is a loss, enter it with parentheses or a negative sign.

Answer 1

To determine the net income (or loss) for Sweet Catering under both the Cash method and the Accrual method, we will analyze each method separately based on the provided transactions.

Cash Method

Under the Cash method, revenues are recognized when cash is received, and expenses are recognized when cash is paid.

Revenues:

1. Received cash for meals served to customers: $2,800
2. Received cash for banquet (on account) - NOT included until cash is received.

Total Revenues = $2,800

Expenses:

1. Electricity bill (paid): $100
2. Prepaid rent (for three months): $2,100 (only the cash outflow is recognized).
3. Kitchen equipment (paid): $3,500.

Total Expenses = $100 + $2,100 + $3,500 = $5,700

Net Income (Loss) = Total Revenues - Total Expenses Net Income = $2,800 - $5,700 = $(2,900)

Accrual Method

Under the Accrual method, revenues are recognized when earned (not necessarily when cash is received), and expenses are recognized when incurred (not necessarily when paid).

Revenues:

1. Cash for meals served to customers: $2,800
2. Banquet served on account: $2,800 (recognized as revenue when the service is provided).

Total Revenues = $2,800 + $2,800 = $5,600

Expenses:

1. Electricity bill (paid): $100
2. Prepaid rent for May (1 month): $2,100 / 3 = $700 (rent expense for May).
3. Accrued salary expense: $2,390
4. Depreciation on kitchen equipment: $100

Total Expenses = $100 + $700 + $2,390 + $100 = $3,290

Net Income (Loss) = Total Revenues - Total Expenses Net Income = $5,600 - $3,290 = $2,310

Summary

• Net Income (Loss) under Cash method: $(2,900)
• Net Income (Loss) under Accrual method: $2,310