Unit 2 In-class Assignment: Accrual vs. Cash Accounting

Scenario A: Daniel bought a brand-new truck for his landscaping business. He paid $30,000, the full amount up front. Assuming there is no salvage value, he plans to use it for 10 consecutive years. His assistant records this transaction on the balance sheet as equipment for $30,000 on the day of the purchase. He had expensed the whole amount on the day of purchase. After two years of owning his truck, Daniel decided to apply for a loan and met with Mr. Thompkins, the bank loan officer. A few minutes into the appointment, Daniel gave him his company's balance sheet. Mr. Thompkins asked Daniel several questions about how the information was provided. Daniel said he would contact him in a few days with the requested information. Daniel claimed that he was using GAAP. Help Daniel to answer the loan officer's questions.

1.Which accounting method was used? Explain why you believe this method was used.

2.Has his assistant recorded equipment correctly? Explain your answer.

3.Please explain the GAAP principle that applies to this scenario.

Scenario B: The famous singer Rihanna is going on a tour. She plans to perform in a concert on Sept 30th. Her agent is handling her financial transactions and recorded $400,000 in revenue from the ticket sales in September. As of July 1st, Rihannas accountant noticed the financial statements reflect all of the revenue from the September ticket sales, a concert yet to be held. The accountant has these questions for the manager:

1.Which accounting method was used? Explain why you believe this method was used.

2.Did the agent correctly record the transaction under GAAP? Why or why not?

3.Explain which GAAP principle applies to this scenario.

Please answer all of the questions, if you can not answer all of the questions do not reply.