Linh Do Ltd sells cars and pays each salesperson a commission of $800 for each car sold. During the month of December, a salesperson, Tom, sold 3 new cars. Linh Do Ltd pays commissions on the 5th of each month following the sale. Tom operates on a cash basis; Linh Do Ltd operates on the accrual basis. Which of the following statements is true?

Question

Linh Do Ltd sells cars and pays each salesperson a commission of $800 for each car sold. During the month of December, a salesperson, Tom, sold 3 new cars. Linh Do Ltd pays commissions on the 5th of each month following the sale. Tom operates on a cash basis;  Linh Do Ltd operates on the accrual basis. Which of the following statements is true?

BlackTom AI · Accepted Answer

This scenario involves differences between accrual accounting (Linh Do Ltd) and cash accounting (Tom).
Option 1: Linh Do Ltd will recognise commission expense in the amount of $2 400 in December
- Under accrual basis, expenses are recognised when incurred, not when paid. The commissions relate to sales that occurred in December (3 cars × $800 each), so Linh Do Ltd incurs a commission expense of $2,400 in December, regardless of the payment date (5th of January).
Option 2: Tom will recognise commission revenue earned in the amount of $2 400 in December
- Tom uses cash basis accounting. Revenue is recognised when cash is received. The commissions are paid on the 5th of the following month, so Tom would not have received any cash in December for December sales; therefore, no $2,400 revenue is recognised in December.
Option 3: Tom will recognise commission expense in the amount of $2 400 in January
- Tom does not incur a commission expense; the employer (Linh Do Ltd) incurs the commission expense. Tom would record revenue (if using accrual concepts) when cash is received, not a separate expense. Thus this option misattributes the expense and the timing to Tom.
Option 4: Tom will recognise revenue in the same month that the car dealer recognises expense
- This statement conflates the timing of recognition between entities and methods. Linh Do Ltd recognises expense in December (accrual), while Tom recognises revenue when cash is received (January). Therefore, revenue recognition by Tom will not align with Linh Do’s December expense timing.

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