(Learning Objective 1: Cash basis versus accrual basis) Masters Consulting had the following selected transactions in August:
Prepaid insurance for August through December, $1,000.
Purchased software for cash, $800.
Performed service and received cash, $900.
Paid advertising expense, $300.
Performed service on account, $3,000.
Purchased computer on account, $1,600.
Collected for the August 11 service.
Paid account payable from August 19.
Paid salary expense, $900.
Adjusted for August insurance expense (see Aug. 1).
Earned revenue of $800 that was collected in advance back in July.
1. Show how each transaction would be handled using the cash basis and the accrual basis. Under each column, give the amount of revenue or expense for August. Journal entries are not required. Use the following format for your answer, and show your computations:
2. Compute August income (loss) before tax under each accounting method.
3. Indicate which measure of net income or net loss is preferable. Use the transactions on August 11 and 24 to explain.