Fundamental Financial Accounting Concepts, 9th Edition
Fundamental Financial Accounting Concepts, 9th Edition
9th Edition
ISBN: 9780078025907
Author: Thomas P Edmonds, Christopher Edmonds, Frances M McNair, Philip R Olds
Publisher: McGraw-Hill Education
Question
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Chapter 7, Problem 8AE

a)

To determine

Prepare the journal entries for 2016 events and post them to T-accounts.

a)

Expert Solution
Check Mark

Answer to Problem 8AE

Prepare the journal entries for 2016 events

DateAccounts title and explanationPost ref

Debit

($)

Credit

($)

1.Cash 10,000 
 Common Stock  10,000
 (To record the issue of common stock)   
     
2.Accounts Receivable 78,000 
 Service Revenue  78,000
 (To record the service revenue)   
     
3.Cash 36,000 
 Service Revenue  36,000
 (To record cash collection)   
     
4.Cash 69,000 
 Accounts Receivable  69,000
 (To record the cash collection from custmors)   
     
5.Salaries Expense 38,000 
 Cash  38,000
 (To record the salaries expenses)   
     
6.Uncollectible Accounts Expense (1) 450 
 Allowance for Doubtful Accounts  450
 (To record the bad debt expense)   
     
7.Service Revenue 114,000 
 Retained Earnings  114,000
 (To close the revenue account)   
     
8.Retained Earnings 38,450 
 Uncollectible Accounts Exp.  450
 Salaries Expense  38,000
 (To close the expense account)   

Table (1)

Prepare the T-accounts and post the journal entries to T-accounts.

Cash
Beginning Balance0
1. Common stock10,000
2. Service revenue36,000
4. Accounts receivables69,0005. Salaries expense38,000
Ending Balance77,000
Accounts receivable
Beginning Balance03. Collections69,000
1. Service on account78,000
Ending Balance9,000
Allowance for doubtful accounts
5. Uncollectible accounts expense (1)450
Ending Balance450
Common stock
1. Cash10,000
Ending Balance10,000
Retained earnings
Beginning Balance0
7. Closing entry38,4506. Closing entry114,000
Ending Balance75,550
Service revenue
6. Closing entry114,000

1. Service on account

2. Cash service

78,000

36,000

Ending Balance0
Salaries expense
4. Cash38,0007. Closing entry38,000
Ending Balance0
Uncollectible accounts expense
5. allowance for doubtful accounts4507. Closing entry450
Ending Balance0

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.

Bad debt expense:

Bad debt expense is an expense account. The amounts of loss incurred from extending credit to the customers are recorded as bad debt expense. In other words, the estimated uncollectible accounts receivable are known as bad debt expense.

Allowance for Uncollectible account:

It is a contra-asset, related to accounts receivable, which holds the estimated amount of uncollectible receivables (bad debts).

Retained earnings:

Retained earnings are the portion of earnings kept by the business for the purpose of reinvestments, payment of debts, or for future growth. In other words, Accumulated amount of all net income less the accumulated amount of dividends declared till date is known as retained earnings.

Service Revenue:

Service Revenue is considered as the income received from the service provided to the customers during the accounting period.

Common stock:

These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.

Calculate the bad debt expense.

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

Bad debt expense= Revenue earned on account × 5%=$9,000×5%=$450 (1)

b)

To determine

Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for 2016.

b)

Expert Solution
Check Mark

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 2016.

Incorporation L
Income statement
For the year ended December 31, 2016
ParticularsAmount ($)Amount ($)
Service Revenue $114,000
Operating Expenses:  
Salaries Expense$38,000 
Uncollectible Accounts Expense450 
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 2016.

Incorporation L
Statement of changes in the Stockholders Equity
For the year ended December 31, 2016
ParticularsAmount ($)Amount ($)
Beginning Common Stock0 
Add: Common Stock Issued10,000 
Ending Common Stock $10,000
   
Beginning Retained Earnings 
Add: Net Income75,550 
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, 2016.

Incorporation L
Balance sheet
As on December 31, 2016
ParticularsAmount ($)Amount ($)
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 Earnings75,550 
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 2016.

Incorporation L
Statement of Cash Flows
For the year ended December 31, 2016
ParticularsAmount ($)Amount ($)
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, 2016.

c)

Expert Solution
Check Mark

Explanation of Solution

Calculate the net realizable value of the accounts receivable at December 31, 2016.

ParticularsAmount ($)
Accounts receivable balance at December 31, 20169,000
Less: Allowance for Doubtful Accounts, December 31, 2016(450)
Net realizable value of the accounts receivable at December 31, 20168,550

Table (6)

Therefore, the net realizable value of the accounts receivable at December 31, 2016 is $8,550.

d(a)

To determine

Prepare the journal entries for 2017 events and post them to T-accounts.

d(a)

Expert Solution
Check Mark

Answer to Problem 8AE

Prepare the journal entries for 2017 events

DateAccounts title and explanationPost ref

Debit

($)

Credit

($)

1.Allowance for Doubtful Accounts 650 
 Accounts Receivable  650
 (To record the write off an uncollectible accounts)   
     
2.Accounts Receivable 88,000 
 Service Revenue  88,000
 (To record the service revenue)   
     
3.Cash 32,000 
 Service Revenue  32,000
 (To record the service revenue)   
     
4.Cash 81,000 
 Accounts Receivable  81,000
 (To record the cash collection from custmors)   
     
5.Salaries Expense 65,000 
 Cash  65,000
 (To record the salaries expenses)   
     
6.Uncollectible Accounts Expense (2) 968 
 Allowance for Doubtful Accounts  968
 (To record the bad debt expense)   

Table (7)

Prepare the T-accounts and post the journal entries to T-accounts.

Cash
Beginning Balance77,000
3. Service revenue32,000
4. Accounts receivables81,0005. Salaries expense65,000
Ending Balance125,000
Accounts receivable
Beginning Balance9,0001. Write-off650
2. Service on account88,0004. Collections81,000
Ending Balance15,350
Allowance for doubtful accounts
Beginning Balance450
1. Write-off6506. Uncollectible account expense (1)968
Ending Balance768
Common stock
Beginning Balance10,000
Ending Balance10,000
Retained earnings
Beginning Balance75,550
Ending Balance75,550
Service revenue

2. Service on account

3. Cash service

88,000

32,000

Ending Balance120,000
Salaries expense
5. Cash65,000
Ending Balance65,000
Uncollectible accounts expense
6. allowance for doubtful accounts968
Ending Balance968

Explanation of Solution

Calculate the bad debt expense

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

Uncollectible account expense(Revenue on Account × 5%)Beginning balance of allowance for doubtful debts+write-off amount=($15,350×5%)$450+$650=$768$450+$650=$968 (2)

d (b)

To determine

Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for 2017.

d (b)

Expert Solution
Check Mark

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 2016.

Incorporation L
Income statement
For the year ended December 31, 2017
ParticularsAmount ($)Amount ($)
Service Revenue $120,000
Operating Expenses:  
Salaries Expense$65,000 
Uncollectible Accounts Expense968 
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 2016.

Incorporation L
Statement of changes in the Stockholders Equity
For the year ended December 31, 2017
ParticularsAmount ($)Amount ($)
Beginning Common Stock10,000 
Add: Common Stock Issued0 
Ending Common Stock $10,000
   
Beginning Retained Earnings75,550  
Add: Net Income54,032 
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, 2017.

Incorporation L
Balance sheet
As on December 31, 2017
ParticularsAmount ($)Amount ($)
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 Earnings129,582 
Total Stockholders’ Equity 139,582
   
Total Liabilities and Stockholders’ Equity $139,582

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 2017.

Incorporation L
Statement of Cash Flows
For the year ended December 31, 2017
ParticularsAmount ($)Amount ($)
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 (5)

d (c)

To determine

Calculate the net realizable value of the accounts receivable at December 31, 2017.

d (c)

Expert Solution
Check Mark

Explanation of Solution

Calculate the net realizable value of the accounts receivable at December 31, 2016.

ParticularsAmount ($)
Accounts receivable balance at December 31, 201715,350
Less: Allowance for Doubtful Accounts, December 31, 2017(768)
Net realizable value of the accounts receivable at December 31, 201714,582

Table (6)

Therefore, the net realizable value of the accounts receivable at December 31, 2017 is $14,582.

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Chapter 7 Solutions

Fundamental Financial Accounting Concepts, 9th Edition

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