Sweet Catering completed the following selected transactions during May 2016:

Question

May 1: Prepaid rent for three months, $3,000
May 5: Received and paid electricity bill, $180
May 9: Received cash for meals served to customers, $2,930
May 14: Paid cash for kitchen equipment, $3,240
May 23: Served a banquet on account, $1,780
May 31: Made the adjusting entry for rent (from May 1).
May 31: Accrued salary expense, $1,940
May 31: Recorded depreciation for May on kitchen equipment, $140
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 for the month of May 2016 under the Cash method and the Accrual method, we need to analyze the transactions separately by each method.

Cash Method:

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

Cash Transactions in May:

1. Received cash for meals served (Revenue): $2,930
2. Paid for electricity bill (Expense): -$180
3. Paid for kitchen equipment (Expense): -$3,240
4. Received cash for banquet (on account, not cash received): $0

Calculating Net Income:

Net Income = Total Revenues - Total Expenses
Net Income = $2,930 - ($180 + $3,240)
Net Income = $2,930 - $3,420
Net Income = -$490 (Net Loss)

Accrual Method:

Under the Accrual method, revenues are recognized when earned (regardless of cash received), and expenses are recognized when incurred (regardless of cash paid).

Accrual Transactions in May:

1. Revenues:

   • Cash for meals served: $2,930
   • Banquet served on account: $1,780
   • Total Revenues: $2,930 + $1,780 = $4,710

2. Expenses:

   • Rent expense (adjusting entry for May): $1,000 (since the prepaid rent is for 3 months, monthly expense is $3,000 / 3)
   • Electricity bill: $180
   • Kitchen equipment depreciation: $140
   • Accrued salary expense: $1,940
   • Total Expenses: $1,000 + $180 + $140 + $1,940 = $3,260

Calculating Net Income:

Net Income = Total Revenues - Total Expenses
Net Income = $4,710 - $3,260
Net Income = $1,450

Summary:

• Net Income (Cash Method): -$490 (a loss)
• Net Income (Accrual Method): $1,450 (a profit)

Thus:

• Cash Method Net Income: ($490)
• Accrual Method Net Income: $1,450