3. The Adia Company was incorporated on September 1, 20X1. Adia had 8 holders of common stock. Jack Adia, who was the president and CEO, held 58% of the shares. The company rented space in chain discount stores and specialized in selling running shoes. Adia's first location was a store in Scottsdale Square Mall. The following events occurred during September: (Click the icon to view the events.) The Adia Company prepared the following accrual-basis income statement and analysis of its transactions for the month of September. 2(Click the icon to view the accrual-method income statement.) (Click the icon to view the transaction analysis.) Requirements 1. If Adia Company measured income on the cash basis, what revenue would be reported for September? 2. Which basis (accrual or cash) provides a better measure of revenue? Why? Requirement 1. If Adia Company measured income on the cash basis, what revenue would be reported for September? Cash basis revenue for September = $ Requirement 2. Which basis (accrual or cash) provides a better measure of revenue? Why? The (1) basis, which records revenue when (2) provides a better measure of revenue. Users of the financial statements believe that this method provides the best framework for relating (3) and, therefore, provides the more proper measure of economic performance. 1: More Info a. e. The company was incorporated. Common stockholders invested $180,000 cash. b. Purchased merchandise inventory for cash, $80,000. c. Purchased merchandise inventory on open account, $10,000. d. Merchandise carried in inventory at a cost of $55,000 was sold for $160,000, $35,000 for cash and $125,000 on open account. Adia carries and will collect these accounts receivable. Collection of a portion of the preceding accounts receivable, $30,000 f. Payments of a portion of accounts payable $9,000. See transaction c. g. Special display equipment and fixtures were acquired on September 1 for $36,000. Their expected useful life was 36 months with no terminal scrap value. Straight-line depreciation was adopted. This equipment was removable. Adia paid $12,000 as a down payment and signed a promissory note for $24,000. h. On September 1, Adia signed a rental agreement with Scottsdale Square Mall. The agreement called for rent of $2,500 per month payable quarterly in advance. Therefore, Adia paid $7,500 cash on September 1 i. The rental agreement also called for a payment of 5% of all sales. This payment was in addition to the flat $2,500 per month. In this way, Scottsdale Square Mall would share in any success of the venture and be compensated for general services such as cleaning and utilities. This payment was to be made in cash on the last day of each month as soon as the sales for the month were tabulated. Therefore, Adia made the payment on September 30. j. Wages, salaries, and sales commissions were all paid in cash for all earnings by employees. The amount was $55,000 k. Depreciation expense for September was recognized. See transaction g. 1 The expiration of an appropriate amount of prepaid rental services was recognized. See transaction h. 2: Data Table $ 160.000 Adia Company Income Statement Month ending September 30, 20X1 Sales Expenses Cost of goods sold Wages, salaries, and commissions Rent $ 55,000 55,000 10,500 1,000 Depreciation Total expenses 121,500 $ 38,500 Net income (loss) 3: Data Table Assets Liabilities + Stockholders' equity Paid-in Retained Merch Prepaid Equip and Cash + A/R + inventory + rent + fixtures A/P + N/P + capital + earnings a. 180 180 b. (80) 80 C. 10 10 35 + 125 d. 1. d.2 160 R (55) E (55) = e. 30 + (30) f. (9) 9 + 36 = 24 h. (9) (12) (8) (8) (55) + i. j. (8) E (55) E (1) E k. (1) = 1. (3) (3) E 74 95 35 5 35 24 180 39 Bal + + + T (1) O accrual O cash (2) O cash is collected O earned and realized (3) O accomplishments (revenues) with efforts (expenses) O cash inflows (receipts) with cash outflows (payments)
