Julio Estela started and operated a small boat repair service company during the current year. He is interested in obtaining a 000 loan from your bank to build a dry dock to store boats for customers in the winter months. At the end of the year, he prepared the following statements based on information stored in a large filing cabinet:

The following is a summary of completed transactions: a. Received the following contributions (at fair value) to the business from the owner when it was started in exchange for 1,000 shares of $ 1 par value common stock in the new company:

Building & 000 && Land & $ 20,000 Tools and equipment & 17,000 && Cash & 1,000 b. Earned service fees during the current year of $ 87,000 ; of the cash collected, $ 20,000 was for deposits from customers on work to be done by Julio in the next year. C. Received the cash dividends on shares of ABC Industrial stock purchased by Julio Estela six years earlier (the stock was not owned by the company). D. Incurred expenses during the current year of $ 61,000. E. Determined amount of supplies on hand (unused) at the end of the current year as $ 700.

Required:

(a) Did Julio prepare the income statement on a cash basis or an accrual basis? Explain how you can tell. Which basis should be used? Explain why