Luke Powers runs an electrician service business. Luke’s staff work Monday to Friday. Wages are paid fortnightly in 2021. Staff are entitled to a
total of $4,000 per fortnight in 2021. Wages are paid to July 28 a Wednesday in 2021 a total of 20 working days. Which of the following statements is correct?

Question

BlackTom AI · Accepted Answer

We start by restating what the scenario provides and what is being asked. Luke Powers’ staff are paid fortnightly, with a total entitlement of $4,000 per fortnight in 2021. Wages are paid on July 28, 2021 (a Wednesday) and July has a total of 20 working days for the period in question. The question asks which statement about the correct accounting treatment or amounts is true, under accrual-basis versus cash-basis accounting.

Option a: 'None of the other options'. To evaluate whether this could be true, determine the amounts that should be recorded under accrual and cash bases for July, and compare them to the figures given in the other options.

Option b: 'If Luke were using accrual-basis accounting, the wages recorded in July would be $8,800'. Under accrual accounting, expenses are recorded when incurred, not when paid. Wages are $4,000 per fortnight, and July consists of 20 working days. Typically, a fortnight is treated as 10 working days (2 weeks × 5 days). Therefore, the daily wage is $4,000 ÷ 10 = $400 per working day. For 20 working days in July, the wages expense that should be recognized for July is 20 × $400 = $8,000, not $8,800. The $8,800 figure would imply 22 working days or a different daily rate, which is not supported by the given data. Thus this option is inaccurate.

Option c: 'If Luke were using accrual-basis accounting, the wages recorded in July would be $4,000'. This would imply that only one fortnight’s wages are recognized in July, ignoring that the month spans 20 working days (two fortnights). Under accrual accounting, we recognize wages for all days worked in July, which, given $4,000 per fortnight, amounts to $8,000 for 20 working days. Therefore $4,000 is too small for July’s accrual.

Option d: 'If Luke were using cash-basis accounting, the wages recorded in July would be $8,800'. Cash-basis accounting records expenses when cash is paid, not when incurred. The payment occurred on July 28 and, as established, July’s earned wages amount to $8,000 under accrual. The cash-basis record would reflect the cash paid during July, which equals the actual amount paid to employees in that pay run. Since the fortnightly entitlement is $4,000, and July’s period covers 2 fortnights (20 working days), the cash paid in July should be $8,000, not $8,800. This option incorrectly states $8,800 and is therefore incorrect.

Option e: 'If Luke were using cash-basis accounting, the wages recorded in July would be $4,000'. As argued, cash-basis records cash payments when they occur. July’s pay run covers 20 working days, i.e., two fortnights, totaling $8,000 to be paid. Reporting only $4,000 would imply recording the payment for only one fortnight, which contradicts the stated fortnightly entitlement and the July payment period. Hence this option is inaccurate.

In summary, each incorrect option either misstates the accrual calculation (20 working days × $400 per day = $8,000, not $8,800), or misaligns accrual vs cash timing (cash-basis would still show $8,000 for two fortnights in July), or misapplies the concept of when wage expenses are recognized. Given the data provided, none of the listed figures correctly reflect the appropriate accrual or cash-basis treatment for July’s wages, based on $4,000 per fortnight and 20 working days in July.

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