Selma operates a contractor's supply store. She maintains her books using the cash method. At the end of the year, her accountant computes her accrual basis income that is used on her tax return. For 2019, Selma had cash receipts of $1,400,000, which included $200,000 collected on accounts receivable from 2018 sales. It also included the proceeds of a $100,000 bank loan. At the end of 2019, she had $250,000 in accounts receivable from customers, all from 2019 sales. a. Compute Selma’s accrual basis gross receipts for 2019.b. Selma paid cash for all of the purchases. The total amount paid for merchandise in 2018 was $1.3 million. At the end of 2018, she had merchandise on hand with a cost of $150,000. At the end of 2019, the cost of merchandise on hand was $300,000. Compute Selma’s gross income from merchandise sales for 2019.

a. Selma's accrual basis gross receipts is $ $ 1,350,000

b. Gross income from merchandise sales  $ 200,000

Explanation:

Computation of gross receipts under accrual basis

Actual cash receipts for 2019                                       $ 1,400,000

Less; Collection of 2018 receivables                           $( 200,000)

Less: Receipts of bank loan                                         $ (100,000)

Add: Receivables from 2019 sales                              $ 250,000

Adjusted gross receipts in accrual basis                    $ 1,350,000

Computation  of gross income

Cost of merchandise sold = Opening merchandise + purchases of merchandise - Clsoing Merchandise

Cost of Merchandise sold $ 150,000 + $ 1,300,000 - $ 300,000  = $ 1,150,000

Gross income = Gross receipts under accrual basis - cost of merchandise sold

Gross Income = $ 1,350,000 = $ 1,150,000 = $ 200,000

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