The following are the summarized transactions of dentist Frieda Rivera, DDS for 20X1, her first year in practice:

a. Acquired equipment and furniture for $84,000. Its expected useful life is 6 years. Dr. Rivera will use straight-line depreciation, assuming zero terminal disposal value.

b. Fees collected, $79,000. These fees included $2,000 paid in advance by some patients on December 31, 20X1.

c. Rent is paid at the rate of $500 monthly, payable quarterly on the twenty-fifth of March, June, September, and December for the following quarter. Total disbursements during 20X1 for rent were $7,500 including an initial payment on January 1.

d. Fees billed but uncollected, December 31, 20X1, $20,000.

e. Utilities expense paid in cash, $700. Additional utility bills unpaid at December 31, 20X1, $100.

f. Salary expense for dental assistant and secretary, $16,000 paid in cash. In addition, $1,000 was earned but unpaid on December 31, 20X1.

Dr. Rivera may elect either the cash basis or the accrual basis of measuring income for income tax purposes, provided that she uses it consistently in subsequent years. Under either alternative, the original cost of the equipment and furniture must be written off over its 6-year useful life rather than being regarded as a lump-sum expense in the first year.

1. Prepare income statements for the year on both the cash and accrual bases, using one column for each basis.

2. Which basis do you prefer as a measure of Dr. Rivera’s performance? Why? What do you think is the justification for the government’s allowing the use of the cash basis for income tax purposes?