Handout 5

Mega keeps its accounting records on a cash basis during the year. At year end, it converts its books to the accrual basis for preparing its financial statements. At the end of 2016, Mega reported the following post-closing trial balance after converting it to the accrual basis. [Hint: These will also be the beginning balances for 2017.]

December 31, 2016 (accrual)

Debit $ 2,700 4,200 2,100 5,600 12,000

$ 4,800 6,100 500 2,000 7,000 6,200

Credit

Cash

Accounts receivable

Supplies

Inventory

Equipment

Accumulated depreciation Accounts payable (for inventory) Salaries payable

Income tax payable

Common stock

Retained earnings

At the end of 2017, you are asked to convert Megas books from cash basis to accrual basis and prepare a balance sheet and income statement on an accrual basis. To do this, you are provided with the following information:

You are provided with the following information as of December 31, 2017:

Cash receipts from customers

Cash payments:

To vendors (for inventory)

To employees

For prepaid supplies

For other operating expenses (OE)

To stockholders

For the 2016 income tax liability that was

paid on March 15, 2017 with tax returns

Other information:

Customers owed Mega

Mega owed vendors (for inventory) Mega owed employees

Physical count of inventory Physical count of supplies

Income tax rate for 2017

67,300

30,600 15,500 2,500 5,500 6,000

2,000

5,900 7,000 900 6,300 1,000

25%

Mega depreciates its equipment using the straight-line method over 10 years with no salvage value. Assume that the balance given for other operating expenses (OE) is the same for both cash and accrual.

Required: Using accrual basis accounting, prepare a 2017 income statement and a 2017 balance sheet.