The following information pertains to the operations of Wilkes Investigating, a private detective agency, for December 2009.
• Wilkes’s employees earn $420 of salary collectively each day. The employees work Monday through Friday and are paid each Friday for the week just worked. December 31 falls on a Tuesday.
• On December 31, the owner estimates that December’s electricity bill will be $240.
• The owner also estimates that the firm will have income tax expense of $800 for December. This amount will be paid in March 2010.
• On December 1, Wilkes received and recorded a $300 payment from a customer for services to be rendered by Wilkes evenly during December, January, and February. Wilkes’s principal revenue account is Fees Revenue.
• Wilkes received $680 cash from a new client on December 28; this amount was properly recorded. No services had been provided to this client as of December 31.
• Bonocher, Inc. owes Wilkes $1,400 for services provided during December. No entry pertaining to these services has been recorded in Wilke’s accounting records.
Required:
(a) For each bulleted item, prepare any necessary adjusting journal entry as of December 31 in Wilkes’s accounting records.
(b) Suppose that Wilkes Investigating uses the cash basis of accounting instead of the accrual basis. Analyze each bulleted item and determine how Wilkes’s revenues and expenses for December would be affected by using the cash rather than accrual basis of accounting.
(c) Write a brief memo indicating whether the cash basis or accrual basis of accounting provides a more appropriate measure of Wilkes’s net income each accounting period.