The Jack Frost Law Firm prepays for advertising in the local newspaper. On January 1, the law firm paid $8,400 for seven months of advertising. How much advertising expense should Jack Frost Law Firm record for the two months ending February 28 under the a. cash basis? b. accrual basis?

a) cash basis - $8,400

b) accrual basis - $2,400

Explanation:

a) cash basis - this is a method of recording transactions only when cash is received or paid.

As at 28 February, the cash prepaid was $8,400. Therefore it is the value on cash basis.

b) accrual basis - this is the method of recording transactions when earned or incurred. As at 28 February, only two months have been incurred for advertising. As such,

=($8,400/ 7 months)× 2 months

= $2,400

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