Chapter 5, Problem 4E

a.

To determine

Show the effect of each transaction on the accounting equation.

Explanation of Solution

Accounting equation: Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below.

$\text{Assets}=\text{Liabilities}+\text{Stockholders' equity}$

Show the effect of each transaction on the accounting equation for 2014:

Table (1)

Show the effect of each transaction on the accounting equation for 2015:

Table (2)

Working note 1: Calculate the Uncollectible accounts expenses for 2014:

Estimated Uncollectible accounts are 1% of the revenue on account. Revenue on account is $45,000.

$\begin{array}{c}\text{Uncollectible account expense= }\left(\begin{array}{l}\text{Revenue earned}\\ \text{ on account}\end{array}\right)\times \left(\begin{array}{l}\text{Estimated rate}\\ \text{ of uncollectibles}\end{array}\right)\\ \text{=\$45,000}\times \text{1\%}\\ \text{=\$450}\end{array}$

Working note 2: Calculate the Uncollectible accounts expenses for 2015:

Estimated Uncollectible accounts are 1% of the revenue on account. Revenue on account is $65,000.

$\begin{array}{c}\text{Uncollectible account expense= }\left(\begin{array}{l}\text{Revenue earned}\\ \text{ on account}\end{array}\right)\times \left(\begin{array}{l}\text{Estimated rate}\\ \text{ of uncollectibles}\end{array}\right)\\ \text{=\$65,000}\times \text{1\%}\\ \text{=\$650}\end{array}$

b. (1)

To determine

Ascertain the net income for 2014.

Explanation of Solution

Net income: Net income is the excess amount of revenue which arises after deducting all the expenses of a company. In simple terms, it is the difference between total revenue and total expenses of the company.

Ascertain the net income for 2014:

$\begin{array}{c}\text{Net income = Service revenue earned on Account – Uncollectible accounts expense}\\ =\$45,000-\$450\\ =\$44,550\end{array}$

Hence, the net income for 2014 is $44,550.

b. (2)

To determine

Ascertain the net cash flows from operating activities for 2014.

Explanation of Solution

Cash flows from operating activities: These refer to the cash received or cash paid in day-to-day operating activities of a company.

During 2014, cash collected from the customers is $32,000, and there is no cash payments made during the year, therefore the net cash flows from the operating activities are $32,000.

b. (3)

To determine

Ascertain the balance of accounts receivables at the end of 2014.

Explanation of Solution

Accounts receivable: Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

The Accounts receivable balance at the end of 2014 is $13,000 (Refer Table (1)).

b. (4)

To determine

Ascertain the net realizable value of accounts receivables at the end of 2014.

Explanation of Solution

Cash realizable value (net realizable value): Cash realizable value is the net amount of receivables which a business expects to collect from its debtors. Accounts receivable less allowance for doubtful accounts is represented as cash realizable value.

Ascertain the net realizable value of accounts receivables at the end of 2014:

$\begin{array}{c}\text{Net realizable value}=\left(\begin{array}{l}\text{Accounts }\\ \text{receivable}\end{array}\right)-\left(\begin{array}{l}\text{Uncollectible }\\ \text{account expense}\end{array}\right)\\ =\$13,000-\$450\\ =\$12,550\end{array}$

Thus, the Net realizable value of accounts receivable at the end of the 2014 is $12,550.

c. (1)

To determine

Ascertain the net income for 2015.

Explanation of Solution

Net income: Net income is the excess amount of revenue which arises after deducting all the expenses of a company. In simple terms, it is the difference between total revenue and total expenses of the company.

Ascertain the net income for 2015:

$\begin{array}{c}\text{Net income = Service revenue earned on Account – Uncollectible accounts expense}\\ =\$65,000-\$650\\ =\$64,350\end{array}$

Hence, the net income for 2015 is $64,350.

c. (2)

To determine

Ascertain the net cash flows from operating activities for 2015.

Explanation of Solution

Cash flows from operating activities: These refer to the cash received or cash paid in day-to-day operating activities of a company.

During 2015, cash collected from the customers is $66,000, and there is no cash payments made during the year, therefore the net cash flows from the operating activities are $66,000.

c. (3)

To determine

Ascertain the balance of accounts receivables at the end of 2015.

Explanation of Solution

Accounts receivable: Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

The Accounts receivable balance at the end of 2015 is $11,680 (Refer Table (2)).

c. (4)

To determine

Ascertain the net realizable value of accounts receivables at the end of 2015.

Explanation of Solution

Cash realizable value (net realizable value): Cash realizable value is the net amount of receivables which a business expects to collect from its debtors. Accounts receivable less allowance for doubtful accounts is represented as cash realizable value.

Ascertain the net realizable value of accounts receivables at the end of 2015:

$\begin{array}{c}\text{Net realizable value}=\left(\begin{array}{l}\text{Accounts }\\ \text{receivable}\end{array}\right)-\left(\begin{array}{l}\text{Uncollectible }\\ \text{account expense}\end{array}\right)\\ =\$11,680-\$780\\ =\$10,900\end{array}$

Thus, the Net realizable value of accounts receivable at the end of the 2015 is $10,900.