During 2018, HomeVideo, Inc. recorded all cash receipts and cash disbursements. However, HomeVideo, Inc.s banker is requiring an income statement and balance sheet prepared on an accrual basis.

The following is a recap of the cash receipts for 2018:

Collections from customers	$ 356,800
Proceeds from bank loan	75,000
Proceeds from sale of common stock	100,000
	$ 531,800

The cash disbursements data is available on the attached Excel sheet. In addition, HomeVideo, Inc.s payroll disbursements for wages totaled $105,200. The data was obtained from a separate (not provided) payroll journal.

Daniels, a family friend, has asked for your assistance in preparing HomeVideo, Inc.s financial statements at December 31, 2018 on an accrual basis. The following additional information is available:

1. Customers owed the company $16,500 at year-end for credit sales. Also, HomeVideo, Inc.s cash collections included $7,000 of amounts collected in advance from other customers for services to be performed in 2019.
2. The firm signed a 3-year lease for a retail store with rent payments starting in January 2018. The rent is due on the 15^thof every month. Additionally, a security deposit of $5,000 was paid along with the first rent payment. This deposit is likely to be returned at the end of the lease term.
3. The equipment purchased during 2018 is depreciated on a straight-line basis assuming no salvage value. The firm uses a convention where one-half year of depreciation is taken in the year of acquisition (regardless of the actual purchase date).
4. The insurance payment was for a 1-year policy starting on February 1, 2018.
5. At year-end, $21,000 is owed to suppliers for merchandise purchased on credit and received.
6. At year-end, merchandise inventory costing $53,700 and supplies totaling $6,400 remained on hand.
7. Salaries earned, but not yet paid to employees at year-end totaled $7,300.
8. The bank loan requires interest at 10% per year and was issued on June 1, 2018. The principal and interest are to be repaid together on May 31, 2019.

Home Video, Inc. (Cash disbursements 1/1/2018 through 3/31/2019):

Insurance (2/1/18)

28,000

Merchandise (2018)

202,809

Merchandise (2019)

68,355

Office Equipment (2018)

55,000

Office Equipment (2019)

21,138

Other Expenses (2018)

12,893

Other Expenses (2019)

4,059

Rent (2018)

27,000

Rent (2019)

8,000

Supplies (2018)

32,452

Supplies (2019)

5,721

Required:

• Prepare an analysis that shows how cash-based income is converted to accrual-based net income for 2018.
• Prepare an accrual-based income statement for 2018 and a balance sheet as of December 31, 2018 using good form.
• Prepare a brief memo explaining the cash-to-accrual conversion and the results of your calculations.