Cash-based and accrual-based accounts compared Daedalus runs a small airline. He keeps his records on a cash basis. Learning that you are a master of the basics of accrual accounting (MBAA), he asks you to show him how the following items should be accounted for on an accrual basis, assuming updating entries are made once a year at year-end.

The company has a 31 December year-end.

1 The company rented an aircraft for two years on 31 March x8. Daedalus recorded the 1.68 million rental payment for the two years as follows:

31 March x8 Dr. Rent expense 1,680,000 Cr. Cash 1,680,000 He made no further entries with respect to the rental.

2 The company received 200,000 from ticket sales in December x8. Ten per cent of the receipts were advance payments by customers for flights to be taken in January x9. Daedalus made the following entry in December:

December x8 Dr. Cash 200,000 Cr. Sales revenue 200,000 3 Some of the airline’s staff are paid weekly. Their last pay day in x8 was Friday, 27 December.

Daedalus made the following entry for the weekly payroll on that date.

27 December x8 Dr. Wage expense 2,800 Cr. Cash 2,800 The next payroll payment date is Friday, 3 January x9. (Ignore holidays and assume a seven-day work week.)

4 The company invests 100,000 in short-term government securities on 1 September x8. When the securities mature on 1 March x9, the company will receive 104,500. Daedalus recorded the following entry on 1 September.

1 September x8 Dr. Short-term investment 100,000 Cr. Cash 100,000 He made no further entry in the company’s books in x8, since no cash was received that year.

(Assume each month has 30 days.)

Required For each of the four items above, show the entries that need to be made to convert the company’s x8 accounts to an accrual basis.

AppenedixLO1