Chapter 5, Problem 9E

a)

To determine

Organize the transactions in accounts under an accounting equation.

Explanation of Solution

Accounting equation: Accounting equation is an accounting tool expressed in the form of equation, by creating a relation between resources or assets of a business and claims on the resources by the creditors, and the owners.

Organize the transactions in accounts under an accounting equation:

Incorporation L
Accounting equation for 2018
Event	Cash	+	Accounts Receivable	−	Allowances	=	Common Stock	+	Retained earnings
1	$10,000	+	NA	-	NA	=	$10,000	+	NA
2	NA	+	$78,000	-	NA	=	NA	+	$78,000
3	$36,000	+	NA	-	NA	=	NA	+	$36,000
4	$69,000	+	($69,000)	-	NA	=	NA	+	NA
5	($38,000)	+	NA	-	NA	=	NA	+	($38,000)
5(1)	NA	+	NA	-	$450	=	NA	+	($450)
Balance	$77,000	+	$9,000	−	$450	=	$10,000	+	$75,550

Table (1)

Working Note:

(1) Calculate the bad debt expense.

Bad debts are estimated 5% of the ending accounts receivables balance. Ending accounts receivable are $9,000.

$\begin{array}{c}\text{Bad debt expense}\text{= Revenue earned on account }\times \text{ 5\%}\\ \text{=}\text{\$9,000}\times 5\text{\%}\\ \text{=}\text{\$450}\end{array}$

b)

To determine

Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for 2018.

Explanation of Solution

Income statement:

It is one of the financial statements, which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period.

Prepare the income statement for 2018.

Incorporation L
Income statement
For the year ended December 31, 2018
Particulars	Amount	Amount
Service Revenue		$114,000
Operating Expenses:
Salaries Expense	$38,000
Uncollectible Accounts Expense	$450
Total Operating Expenses		($38,450)
Net Income		$75,550

Table (2)

Statement of stockholder's equity:

This statement reports the beginning stockholder's equity and all the changes which led to ending stockholder's equity. Additional capital, net income from income statement is added to and dividends are deducted from beginning stockholder's equity to arrive at the end result, closing balance of stockholder's equity.

Prepare the statement of changes in the stockholders equity for 2018.

Incorporation L
Statement of changes in the Stockholders Equity
For the year ended December 31, 2018
Particulars	Amount ($)	Amount ($)
Beginning Common Stock	0
Add: Common Stock Issued	10,000
Ending Common Stock		$10,000
Beginning Retained Earnings	0
Add: Net Income	75,550
Ending Retained Earnings		$75,550
Total Stockholders’ Equity		$85,550

Table (3)

Balance Sheet:

Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet as on December 31, 2018.

Incorporation L
Balance sheet
As on December 31, 2018
Particulars	Amount ($)	Amount ($)
Assets
Cash		$77,000
Accounts Receivable	$9,000
Less: Allowance for Doubtful Accounts	(450)	8,550
Total Assets		$85,550
Liabilities		$0
Stockholders’ Equity
Common Stock	$10,000
Retained Earnings	75,550
Total Stockholders’ Equity		85,550
Total Liabilities and Stockholders’ Equity		$85,550

Table (4)

 Statement of cash flows:

 It is one of the financial statements which reports the source and application of cash between two balance sheet dates. It shows how the cash is sourced and used for the company’s operating, investing, and financing activities.

Prepare the statement of cash flows for 2018.

Incorporation L
Statement of Cash Flows
For the year ended December 31, 2018
Particulars	Amount ($)	Amount ($)
Cash Flows From Operating Activities:
Cash collcetion from Customers	$105,000
Cash paid for Expenses	(38,000)
Net Cash Flow from Operating Activities		$67,000
Cash Flows From Investing Activities		0
Cash Flows From Financing Activities
Issue of Common Stock		10,000
Net Change in Cash		77,000
Add: Beginning Cash Balance		0
Ending Cash Balance		$77,000

Table (5)

c)

To determine

Calculate the net realizable value of the accounts receivable at December 31, 2018.

Explanation of Solution

Calculate the net realizable value of the accounts receivable at December 31, 2018.

Particulars	Amount ($)
Accounts receivable balance at December 31, 2018	9,000
Less: Allowance for Doubtful Accounts, December 31, 2018	(450)
Net realizable value of the accounts receivable at December 31, 2018	8,550

Table (6)

Therefore, the net realizable value of the accounts receivable at December 31, 2018 is $8,550.

d. (a)

To determine

Organize the transactions in accounts under an accounting equation.

Explanation of Solution

Accounting equation: Accounting equation is an accounting tool expressed in the form of equation, by creating a relation between resources or assets of a business and claims on the resources by the creditors, and the owners.

Organize the transactions in accounts under an accounting equation:

Incorporation L
Accounting equation for 2019
Event	Cash	+	Accounts Receivable	−	Allowances	=	Common Stock	+	Retained earnings
Balance	$77,000		$9,000		$450		$10,000		$75,550
1	NA		($650)		($650)		NA		NA
2	NA		$88,000		NA		NA		$88,000
3	$32,000		NA		NA		NA		$32,000
4	$81,000		($81,000)		NA		NA		NA
5	($65,000)		NA		NA		NA		($65,000)
6	NA		NA		968		NA		($968)
Balance	$125,000	+	$15,350	−	$768	=	$10,000	+	$129,582

Table (7)

(2) Calculate the bad debt expense

Bad debts are estimated 5% of the ending accounts receivables balance. Ending accounts receivable are $15,350.

$\begin{array}{c}\begin{array}{l}\text{Uncollectible account }\\ \text{expense}\end{array}\}\text{= }\left(\text{Revenue on Account }\times \text{ 5\%}\right)-\left(\begin{array}{l}\text{Beginning balance of }\\ \text{allowance for doubtful debts}\end{array}\right)+\left(\text{Write-off amount}\right)\\ \text{=}\left(\text{\$15,350}\times 5\text{\%}\right)-\$450+\$650\\ \text{=\$768}-\$450+\$650\\ =\$968\end{array}$

d. (b)

To determine

Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for 2019.

Explanation of Solution

Income statement: It is one of the financial statements, which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period.

Prepare the income statement for 2019.

Incorporation L
Income statement
For the year ended December 31, 2019
Particulars	Amount ($)	Amount ($)
Service Revenue		$120,000
Operating Expenses:
Salaries Expense	$65,000
Uncollectible Accounts Expense	968
Total Operating Expenses		(65,968)
Net Income		$54,032

Table (8)

Statement of stockholder's equity: This statement reports the beginning stockholder's equity and all the changes which led to ending stockholder's equity. Additional capital, net income from income statement is added to and dividends are deducted from beginning stockholder's equity to arrive at the end result, closing balance of stockholder's equity.

Prepare the statement of changes in the stockholders equity for 2019.

Incorporation L
Statement of changes in the Stockholders Equity
For the year ended December 31, 2019
Particulars	Amount ($)	Amount ($)
Beginning Common Stock	10,000
Add: Common Stock Issued	0
Ending Common Stock		$10,000
Beginning Retained Earnings	75,550
Add: Net Income	54,032
Ending Retained Earnings		$129,582
Total Stockholders’ Equity		$139,582

Table (9)

Balance Sheet: Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet as on December 31, 2019.

Incorporation L
Balance sheet
As on December 31, 2019
Particulars	Amount ($)	Amount ($)
Assets
Cash		$125,000
Accounts Receivable	$15,350
Less: Allowance for Doubtful Accounts	(768)	14,582
Total Assets		$139,582
Liabilities		$0
Stockholders’ Equity
Common Stock	$10,000
Retained Earnings	129,582
Total Stockholders’ Equity		139,582
Total Liabilities and Stockholders’ Equity		$139,582

Table (10)

 Statement of cash flows: It is one of the financial statements which reports the source and application of cash between two balance sheet dates. It shows how the cash is sourced and used for the company’s operating, investing, and financing activities.

Prepare the statement of cash flows for 2019.

Incorporation L
Statement of Cash Flows
For the year ended December 31, 2019
Particulars	Amount	Amount
Cash Flows From Operating Activities:
Cash collcetion from Customers	$113,000
Cash paid for Expenses	($65,000)
Net Cash Flow from Operating Activities		$48,000
Cash Flows From Investing Activities		$0
Cash Flows From Financing Activities
Issue of Common Stock		$0
Net Change in Cash		$48,000
Add: Beginning Cash Balance		$77,000
Ending Cash Balance		$125,000

Table (11)

d (c)

To determine

Calculate the net realizable value of the accounts receivable at December 31, 2019.

Explanation of Solution

Calculate the net realizable value of the accounts receivable at December 31, 2019.

Particulars	Amount ($)
Accounts receivable balance at December 31, 2019	15,350
Less: Allowance for Doubtful Accounts, December 31, 2019	(768)
Net realizable value of the accounts receivable at December 31, 2019	14,582

Table (12)

Therefore, the net realizable value of the accounts receivable at December 31, 2019 is $14,582.