1. A company uses the cash basis of accounting to record financial activity. Cash basis net income totaled $100,000 in Year 2. The company must generate accrual basis financial statements at the end of Year 2. It was determined that the following balances need to be reported on the balance sheet.

12/31/Year 1 12/31/Year 2

Unearned revenue 5,000 8,000

Prepaid expenses 2,000 4,000

In addition, on January 1, Year 1, the company purchased a piece of equipment for $35,000 and paid for it with cash. When preparing the accrual basis financials, the company intends to depreciate the equipment over five years. The accrual basis net income in Year 2 will total

1. $99,000
2. $92,000
3. $102,000
4. $95,000
5. $101,000