The Orange Lily Law Firm prepays for advertising in the local newspaper. On January 1, Orange Lily paid $3,600 for six months of advertising. How much advertising expense should Orange Lily Law Firm record for the two months ending February 28 under the a. cash basis? b. accrual basis?

a. Cash basis - amount is $3,600

b. Accrual basis - amount is $1,200

Explanation:

a.

Under the cash basis, the amount which will be recorded is as:

In cash basis, it is the method or way of recording the accounting transactions for the revenue and the expenses only when the cash (corresponding) is received or when the payments are made.

So, in this $3,600 is paid, the full amount will be recorded.

b.

Under Accrual basis, the amount which will be recorded as:

In Accrual basis, it is the method or way of recording the accounting transactions for the revenue when it is earned and the expenses is recorded when it is incurred.

So, in this the expense to be recorded for 2 months, it is computed as:

For per month = $3,600 / 6

= $600 per month

For 2 months, it is:

= $600 * 2

= $1,200

Therefore, the amount is $1,200 for 2 months.