Marie's Catering makes sandwiches for vending machines. The sandwiches are delivered to the vendor on the same day that they are made. The following events took place during the first year of operations.
a. On the first day of the year, issued common stock for a $20,000 cash investment and a $10,000 investment of equipment. The equipment is expected to last 10 years and will be worthless at the end of that time.
b. Purchased a delivery truck at the beginning of the year at a cost of $14,000 cash. The truck is expected to last five years and will be worthless at the end of that time.
c. Made and sold 50,000 sandwiches during the first year of operations. The costs incurred to make the sandwiches are (1) $800 monthlyrent on a facility that included utilities and insurance, (2) $25,000 of meat, cheese, bread, and condiments (all food was purchased on account and $4,000 is still unpaid at year-end and even though all of the food has been used), and (3) $35,000 paid in salaries and wages to employees and supervisors.
d. Paid $12,00 for part-time office staff salaries.
e. Sold all sandwiches on account for $2 each. As of year-end, $25,000 is still due from the vendors.
Required.
1. How much revenue will Marie's Catering recognize under the cash basis and under the accrual basis?
2. Explain how accountants apply the revenue recognition principle to Marie's small business. What conditions would allow Marie's to use the cash method to recognize revenue.
3. Prepare an income statement according to the accrual method. Ignore Income taxes.