LO.2 Blue Company, an architectural firm, has a bookkeeper who maintains a cash receipts and disbursements journal. At the end of the year, the company hires you to convert the cash receipts and disbursements into accrual basis revenues and expenses.

The total cash receipts are summarized as follows:

Cash sales $150,000 Collections on accounts receivable 450,000 Bank loan 90,000 Total cash receipts $690,000 The accounts receivable from customers at the end of the year are $210,000. You note that the accounts receivable at the beginning of the year were $160,000. The cash sales included $60,000 of prepayments for services to be provided over the next 36 months (i.e., 12 months of such services relate to 2012).

a. Compute the company’s accrual basis gross income for 2012.

b. Would you recommend that Blue use the cash method or the accrual method?

c. The company does not maintain an allowance for uncollectible accounts. Would you recommend that such an allowance be established for tax purposes? Explain.