Reference no: EM132672601
Problem - Decision Making Blue Company, an architectural firm, has a bookkeeper who maintains a cash receipts and disbursements journal. At the end of the year (2019), the company hires you to convert the cash receipts and disbursements into accrual basis revenues and expenses. The total cash receipts are summarized as follows.
Cash sales $150,000
Collections on accounts receivable 350,000
Bank loan 90,000
Total cash receipts $590,000
The accounts receivable from customers at the end of the year are $120,000. You note that the accounts receivable at the beginning of the year were $190,000. The cash sales included $30,000 of prepayments for services to be provided over the period January 1, 2019, through December 31, 2021.
Required -
a. Compute the company's accrual basis gross income for 2019.
b. Would you recommend that Blue use the cash method or the accrual method? Why?
c. The company does not maintain an allowance for uncollectible accounts. Would you recommend that such an allowance be established for tax purposes? Explain.