Payson Sports, Inc., sells sports equipment to customers. Its fiscal year ends on December 31. The following transactions occurred in the current year
a. Purchased $250,000 of new pillow inventory; paid $90,000 in cash and owed the rest on account.
b. Paid employees $180,300 in wages for work during the year; an additional $3,700 for the current year's wages will be paid in January of the next year.
c. Sold pillows to customers for $750,000; received $500,000 in cash and customers owed the rest on account. The cost of the pillow inventory to Lay Perfect Pillow was $485,000.
d. Paid $17,200 cash for utilities for the year.
e. Received $70,000 from customers as deposits on orders of new pillows to be sold to the customers in January of the next year.
f. Received a $1,930 utilities bill for December of the current year that will be paid in January of the next year.
Required:
1. Prepare the journal entries of above transactions.
2. Which basis of accounting (cash or accrual) provides more useful information to investors, creditors, and other users? Why?

Note: Total wages expenses (180,300 + 3,700) = $184,000. Among those, 180,300 has been paid during the year, $3,700 will be paid later, so a liability (wages payable) increases.

c. Debit Cash $500,000

Debit Accounts receivable $250,000

Credit Sales revenue $750,000

Note: Sold pillows to customers with cash and on account.

As the company is a merchandise company, it has to record the cost of goods sold.

Debit Cost of goods sold $485,000

Credit Inventory $485,000

d. Debit Utilities expense $17,200

Credit Cash $17,200

Note: Paid utilities bill, therefore, cash decreases.

e. Debit Cash $70,000

Credit Unearned revenue $70,000

Note: As the service will be performed in the future and cash is received today, according to the accrual basis, revenue will be recognized whenever it received, not whenever the service will be performed.

f. Debit Utilities expense $1,930

Credit Utilities payable $1,930

Note: As it is unpaid, a liability will arise.

Req. B

Accrual basis of accounting provides more reliable and influential information to investors, creditors, and other users. It shows a clear picture of the company's assets, income, and liabilities to the internal and external people of the company. Because in an accrual accounting, all the records (either paid or not yet performed) have been kept separately.