Cash vs. Accrual Accounting questions

Part IV – Cash vs. Accrual Accounting
Prime Purchase is an electronics retailer. Indicate the effect of each of the following
transactions (i.e. increase, decrease or no change) under the cash basis and accrual basis of
accounting for Prime Purchase during 2024.
Clarification: For cash accounting, show changes in the cash account; for accrual
accounting, show changes in the income statement.
Examples: Prime Purchase provided services and received $4,000 in cash.
Cash basis
Increase $4,000
Accrual basis
Increase $4,000
Prime Purchase received a phone bill that amounts to $500 (related to calls made
during 2024). Prime Purchase will pay the bill in January 2025.
Cash basis
No change
Accrual basis
Decrease $500
1. On November 12th, Prime Purchase purchased inventory for $180,000.
$125,000 in cash and owed the rest on account.
Cash basis
Accrual basis
________
___________
It paid
2. Prime Purchase paid employees $14,000 in wages for work done during the year 2024.
An additional $2,000 for wages earned during 2024 will be paid in January 2025.
Cash basis
Accrual basis
_________
___________
3. On December 15th, Prime Purchase paid $24,000 for a twelve-month fire insurance policy
that runs from December 16th, 2024 to December 15th, 2025. Include the effect of any
adjusting entry necessary on December 31st. Assume December 16th – December 31st
represents half of one month.
Cash basis
Accrual basis
_________
___________
4. Prime Purchase sold merchandise for $200,000 (half in cash and half on account). This
merchandise had been purchased by Prime Purchase for $125,000 in a prior accounting
period.
Cash basis
_________
Accrual basis
___________
5. On December 24th, Prime Purchase made $26,000 cash sales of gift certificates, which can
be used to purchase merchandise at the store. None of the gift certificates were redeemed
by December 31st.
Cash basis
Accrual basis
____________
____________
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