Chapter 7, Problem 17BP

For Year 1:

a.

To determine

Identify whether the given transactions are asset source, asset use, asset exchange, or claims exchange.

Explanation of Solution

Identify the type of each transaction for Year 1:

Event Number (Year 1)	Type of Transaction
1. Issued common stock for cash.	Asset Source
2. Service revenue earned on account.	Asset Source
3. Collection of accounts receivable.	Asset Exchange
4. Adjusted the accounts to recognize uncollectible accounts expense.	Asset Use

Table (1)

Asset source transactions are the transactions that results in an increase of both the asset and claims on assets.

Asset use transactions are the transactions that results in a decrease of both the asset and claims on assets.

Asset exchange transactions are the transactions that results in increase in one asset and decrease in the other asset.

Claim exchange transactions are the transactions that decreases one claim and increases other claims; the total claims remains unchanged.

For Year 1:

b.

To determine

Show the effect of each transaction on the elements of the financial statements for Year 1 using horizontal statement model.

Explanation of Solution

Effect of each transaction on the elements using horizontal statement model for Year 1:

Table (2)

For Year 1:

c.

To determine

Record the transactions in general journal and post them to T-accounts for Year 1.

Explanation of Solution

Percentage of revenue allowance method: Credit sales are recorded by debiting (increasing) accounts receivable account. The bad debts is a loss incurred out of credit sales, hence uncollectible accounts can be estimated as a percentage of credit sales or total sales.

It is a method of estimating the bad debts (expected loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of net credit sale (or total sales) for a specific period. Under percentage of sales method, estimated bad debts would be treated as an uncollectible account expense of the particular period.

Record the transactions in general journal:

Date	Event No.	Account title and explanation	Debit ($)	Credit ($)
Year 1	1	Cash	5,000
		Common stock		5,000
		(To record the issue of common stock)
Year 1	2	Accounts receivable	70,000
		Service revenue		70,000
		(To record the service revenue earned on account)
Year 1	3	Cash	62,000
		Accounts receivable		62,000
		(To record the cash collected from accounts receivable)
Year 1	4	Uncollectible accounts expense (1)	1,400
		Allowance for doubtful accounts		1,400
		(To record the uncollectible accounts expense)

Table (3)

Working note:

Calculate the amount for uncollectible accounts expense:

$\begin{array}{c}\text{Uncollectible accounts expense}=\text{Revenue}\times \text{Percent of sales on account}\\ =\$70,000\times 2\%\\ =\$1,400\end{array}$ (1)

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a) The title of the account

b) The left or debit side

c) The right or credit side

Post the transactions to T-account:

Cash
1.	$5,000
3.	$62,000
Ending balance	$67,000

Accounts receivable
2.	$70,000	3.	$62,000
Ending balance	$8,000

Common stock
		1.	$5,000
		Ending balance	$5,000

Service revenue
		2.	$70,000
		Ending balance	$70,000

Allowance for doubtful accounts
		4.	$1,400
		Ending balance	$1,400

Uncollectible accounts expense
4.	$1,400
Ending balance	$1,400

For Year 1:

d.

To determine

Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Year 1.

Explanation of Solution

Income statement: The financial statement 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 is referred to as income statement.

Prepare the income statement.

Company SC
Income statement
For the year ended, Year 1
Particulars	Amount($)	Amount ($)
Revenue
Service revenue	70,000
Total revenues		70,000
Less: Expenses
Uncollectible accounts expense	1,400
Total expenses		1,400
Net income		68,600

Table (4)

Statement of changes in the stockholders’ equity: This statement reflects whether the components of stockholders’ equity have increased or decreased during the period.

Prepare the statement of changes in stockholders’ equity.

Company SC
Statement of changes in stockholders’ equity
For the year, Year 1
Particulars	Amount ($)	Amount ($)
Beginning common stock	0
Add: Common stocks issued	5,000
Ending common stock		5,000
Beginning retained earnings	0
Add: Net income	68,600
Less: Dividends	0
Ending retained earnings		68,600
Total stockholders’ equity		73,600

Table (5)

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Prepare the balance sheet.

Company SC
Balance sheet
As of 31st December, Year 1
Particulars	Amount ($)	Amount ($)
Assets
Cash		67,000
Accounts receivable	8,000
Less: Allowance for doubtful accounts	1,400	6,600
Total assets		$73,600
Liabilities		0
Stockholders’ equity
Common stock	5,000
Retained earnings	68,600
Total stockholders' equity		73,600
Total liabilities and stockholders' equity		73,600

Table (6)

Statement of cash flows: This statement reports all the cash transactions involves for inflow and outflow of cash, and the result of these transactions is reported as an ending balance of cash at the end of reported period.

Prepare the statement of cash flows.

Company SC
Statement of cash flow
For the year ended 31st December, Year 1
Particulars	Amount ($)	Amount ($)
Cash flow from operating activities:
Inflow from customers	62,000
Net cash flow from operating activities		62,000
Cash flow from investing activities		0
Cash flow from financing activities
Inflow from issue of common stock	5,000
Net cash flow from financing activities		5,000
Net change in cash		67,000
Add: Beginning cash balance		0
Ending cash balance		67,000

Table (7)

For Year 1:

e.

To determine

Prepare the closing entries, post them to closing entries and prepare the post-closing trial balance for the Year 1.

Explanation of Solution

Closing entries:

Closing entries are those journal entries, which are passed to transfer the final balances of temporary accounts, (all revenues account, all expenses account and dividend) to the Retained Earnings account. Closing entries produce a zero balance in each temporary account.

Prepare the closing entries.

Date		Account title and explanation	Post ref	Debit ($)	Credit ($)
Year 1	1	Service revenue		70,000
		Retained earnings			70,000
		(To record the closing entries for service revenue)
Year 1	2	Retained earnings		1,400
		Uncollectible accounts expense			1,400
		(To record the closing entry for expenses)

Table (8)

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a) The title of the account

b) The left or debit side

c) The right or credit side

Post the transactions to T-account.

Service revenue
1.	$70,000	Balance	$70,000
		Ending balance	$0

Retained earnings
2.	$1,400	1.	$70,000
		Ending balance	$68,600
Uncollectible accounts expense
Balance	$1,400	2.	$1,400
Ending balance	$0

Post-closing trial balance:

The post-closing trial balance is a summary of all ledger accounts, and it shows the debit and the credit balances after the closing entries are journalized and posted.  The post-closing trial balance contains only permanent (balance sheet) accounts, and the debit and the credit balances of permanent accounts should agree.

Prepare the post-closing trial balance.

Company SC
Post-Closing Trial Balance
December 31, Year 1
Account Title	Debit ($)	Credit ($)
Cash	67,000
Accounts Receivable	8,000
Allowance for Doubtful Accounts		1,400
Common Stock		5,000
Retained Earnings		68,600
Totals	75,000	75,000

Table (9)

For Year 2:

a.

To determine

Identify whether the given transactions are asset source, asset use, asset exchange, or claims exchange.

Explanation of Solution

Identify the type of each transaction for Year 2:

Event Number (Year 2)	Type of Transaction
1. Recognized service revenue on account.	Asset Source
2. Collection of accounts receivable.	Asset Exchange
3. Accounts receivable were uncollectible and written off.	Asset Exchange
4. a. Allowance made for doubtful accounts.	Asset Exchange
4.b. Cash collected for accounts receivable	Asset exchange
5. Payment made for operating expenses.	Asset use
6. Adjusted the accounts to recognize uncollectible accounts expense.	Asset use

Table (10)

Asset source transactions are the transactions that results in an increase of both the asset and claims on assets.

Asset use transactions are the transactions that results in a decrease of both the asset and claims on assets.

Asset exchange transactions are the transactions that results in increase in one asset and decrease in the other asset.

Claim exchange transactions are the transactions that decreases one claim and increases other claims; the total claims remains unchanged.

For Year 2:

b.

To determine

Show the effect of each transaction on the elements of the financial statements for Year 2 using horizontal statement model.

Explanation of Solution

Effect of each transaction on the elements using horizontal statement model for Year 2:

Table (11)

For Year 2:

c.

To determine

Record the transactions in general journal and post them to T-accounts for Year 2.

Explanation of Solution

Percentage of revenue allowance method: Credit sales are recorded by debiting (increasing) accounts receivable account. The bad debts is a loss incurred out of credit sales, hence uncollectible accounts can be estimated as a percentage of credit sales or total sales.

It is a method of estimating the bad debts (expected loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of net credit sale (or total sales) for a specific period. Under percentage of sales method, estimated bad debts would be treated as an uncollectible account expense of the particular period.

Record the transactions in general journal.

Date	Event No.	Account title and explanation	Debit ($)	Credit ($)
Year 2	1	Accounts receivable	84,000
		Service revenue		84,000
		(To record the service revenue on account)
Year 2	2	Cash	70,000
		Accounts receivable		70,000
		(To record the collection made from accounts receivable)
Year 2	3	Allowance for doubtful accounts	1,100
		Accounts receivable		1,100
		(To record the write off allowance for doubtful accounts)
Year 2	4.a	Accounts receivable	200
		Allowance for doubtful accounts		200
		(To reinstate the written off accounts )
Year 2	4.b	Cash	200
		Accounts receivable		200
		(To record the recovered portion of uncollectible)
Year 2	5	Operating expenses	51,200
		Cash		51,200
		(To record the entry for payment of operating expenses)
Year 2	6	Uncollectible accounts expense (2)	840
		Allowance for doubtful accounts		840
		(To record the uncollectible accounts expense)

Table (12)

Working note:

Calculate the amount for uncollectible accounts expense:

$\begin{array}{c}\text{Uncollectible accounts expense}=\text{Revenue}\times \text{Percent of sales on account}\\ =\$84,000\times 1\%\\ =\$840\end{array}$ (2)

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a) The title of the account

b) The left or debit side

c) The right or credit side

Post the transactions to T-account.

Cash
Balance	$67,000	5.	$51,200
2.	$70,000
4b.	$800
Ending balance	$86,000

Accounts receivable
Balance	$8,000	2.	$70,000
1.	$84,000	3.	$1,100
4a.	$200	4b.	$200
Ending balance	$20,900

Common stock
		Balance	$5,000
		Ending balance	$5,000

Service revenue
		1.	$84,000
		Ending balance	$84,000

Uncollectible accounts expense
6.	$840
Ending balance	$840

Operating expense
5.	$51,200
Ending balance	$51,200

Allowance for doubtful debts
3.	$1,100	Balance	$1,400
		4a.	$200
		6.	$840
		Ending balance	$1,340

For Year 2:

d.

To determine

Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for the Year 2.

Explanation of Solution

Income statement: The financial statement 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 is referred to as income statement.

Prepare the income statement.

Company SC
Income statement
For the year ended, Year 2
Particulars	Amount($)	Amount ($)
Revenue
Service revenue	84,000
Total revenues		84,000
Less: Expenses
Operating expense	51,200
Uncollectible accounts expense	840
Total expenses		52,040
Net income		31,960

Table (13)

Statement of changes in the stockholders’ equity: This statement reflects whether the components of stockholders’ equity have increased or decreased during the period.

Prepare the statement of changes in stockholders’ equity.

Company SC
Statement of changes in stockholders’ equity
For the year, Year 2
Particulars	Amount ($)	Amount ($)
Beginning common stock	5,000
Add: Common stocks issued	0
Ending common stock		5,000
Beginning retained earnings	68,600
Add: Net income	31,960
Less: Dividends	0
Ending retained earnings		100,560
Total stockholders’ equity		105,560

Table (14)

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Prepare the balance sheet.

Company SC
Balance sheet
As of 31st December, Year 2
Particulars	Amount ($)	Amount ($)
Assets
Cash		86,000
Accounts receivable	20,900
Less: Allowance for doubtful accounts	1,340	19,560
Total assets		$105,560
Liabilities		0
Stockholders’ equity
Common stock	5,000
Retained earnings	100,560
Total stockholders' equity		105,560
Total liabilities and stockholders' equity		105,560

Table (15)

Statement of cash flows: This statement reports all the cash transactions involves for inflow and outflow of cash, and the result of these transactions is reported as an ending balance of cash at the end of reported period.

Prepare the statement of cash flows.

Company SC
Statement of cash flow
For the year ended 31st December, Year 2
Particulars	Amount ($)	Amount ($)
Cash flow from operating activities:
Inflow from customers	70,200
Outflow from customers	(51,200)
Net cash flow from operating activities		19,000
Cash flow from investing activities		0
Cash flow from financing activities		0
Net change in cash		19,000
Add: Beginning cash balance		67,000
Ending cash balance		86,000

Table (16)

For Year 2:

e.

To determine

Prepare the closing entries, post them to T-account and prepare the post-closing trial balance.

Explanation of Solution

Closing entries:

Closing entries are those journal entries, which are passed to transfer the final balances of temporary accounts, (all revenues account, all expenses account and dividend) to the Retained Earnings account. Closing entries produce a zero balance in each temporary account.

Prepare the closing entries.

Date		Account title and explanation	Post ref	Debit ($)	Credit ($)
Year 2	1	Service revenue		84,000
		Retained earnings			84,000
		(To record the closing entries for service revenue)
Year 2	2	Retained earnings		52,040
		Operating expenses			51,200
		Uncollectible accounts expense			840
		(To record the closing entry for expenses)

Table (17)

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a) The title of the account

b) The left or debit side

c) The right or credit side

Post the transactions to T-account.

Service revenue
1.	$84,000	Balance	$84,000
		Ending balance	$0

Retained earnings
2.	$52,040	Balance	$68,600
		1.	$84,000
		Ending balance	$100,560
Operating expenses
Balance	$51,200	2.	$51,200
Ending balance	$0

Uncollectible accounts expense
Balance	$840	2.	$840
Ending balance	$0

Post-closing trial balance:

The post-closing trial balance is a summary of all ledger accounts, and it shows the debit and the credit balances after the closing entries are journalized and posted.  The post-closing trial balance contains only permanent (balance sheet) accounts, and the debit and the credit balances of permanent accounts should agree.

Prepare the post-closing trial balance.

Company J
Post-Closing Trial Balance
December 31, Year 2
Account Title	Debit ($)	Credit ($)
Cash	86,000
Accounts Receivable	20,900
Allowance for Doubtful Accounts		1,340
Common Stock		5,000
Retained Earnings		100,560
Totals	106,900	106,900

Table (18)