Chapter 5, Problem 10E

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:

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 $15,000.

$\begin{array}{c}\text{Bad debt expense}\text{= }\left(\begin{array}{l}\text{Revenue earned }\\ \text{on account }\end{array}\right)\times \left(\begin{array}{l}\text{Estimated rate}\\ \text{ of uncollectibles}\end{array}\right)\\ \text{=}\text{\$15,000}\times 5\text{\%}\\ \text{=}\text{\$750}\end{array}$

b)

To determine

Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for 2014.

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 2014.

Incorporation F
Income statement
For the year ended December 31, 2014
Particulars	Amount	Amount
Service Revenue		$102,000
Operating Expenses:
Salaries Expense	$24,000
Uncollectible Accounts Expense	$750
Total Operating Expenses		($24,750)
Net Income		$77,250

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 2014.

Incorporation F
Statement of changes in the Stockholders Equity
For the year ended December 31, 2014
Particulars	Amount	Amount
Beginning Retained Earnings	$0
Add: Net Income	$77,250
Ending Retained Earnings		$77,250
Total Stockholders’ Equity		$77,250

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, 2014:

Incorporation F
Balance sheet
As on December 31, 2014
Assets
Cash		$63,000
Accounts Receivable	$15,000
Less: Allowance for Doubtful Accounts	($750)	$14,250
Total Assets		$77,250
Liabilities		$0
Stockholders’ Equity
Common Stock	$0
Retained Earnings	$77,250
Total Stockholders’ Equity		$77,250
Total Liabilities and Stockholders’ Equity		$77,250

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 2014:

Incorporation F
Statement of cash flows
For the year ended December 31, 2014
Particulars	Amount	Amount
Cash Flows From Operating Activities:
Cash collection from Customers	$87,000
Cash paid for Expenses	($24,000)
Net Cash Flow from Operating Activities		$63,000
Cash Flows From Investing Activities		$0
Cash Flows From Financing Activities		$0
Net Change in Cash		$63,000
Add: Beginning Cash Balance		$0
Ending Cash Balance		$63,000

Table (5)

c)

To determine

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

Calculate the net realizable value of the accounts receivable at December 31, 2014.

Particulars	Amount ($)
Accounts receivable balance at December 31, 2014	$15,000
Less: Allowance for Doubtful Accounts, December 31, 2014	($750)
Net realizable value of the accounts receivable at December 31, 2014	$14,250

Table (6)

Therefore, the net realizable value of the accounts receivable at December 31, 2014 is $14,250.

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:

Table (7)

Working Note 2: Calculate the bad debt expense

Bad debts are estimated 5% of the ending accounts receivables balance. Ending accounts receivable for the year 2015 are $19,380.

$\begin{array}{c}\begin{array}{l}\text{Uncollectible account }\\ \text{expense}\end{array}\}\text{= }\left[\left(\begin{array}{l}\text{Revenue on }\\ \text{Account}\end{array}\right)\times \left(\begin{array}{l}\text{Estimated rate}\\ \text{ of uncollectibles}\end{array}\right)\right]-\left(\begin{array}{l}\text{Beginning balance of }\\ \text{allowance for doubtful debts}\end{array}\right)+\left(\text{Write-off amount}\right)\\ \text{=}\left(\text{\$19,380}\times 5\text{\%}\right)-\$750+\$620\\ \text{=\$969}-\$750+\$620\\ =\$839\end{array}$

d (b)

To determine

Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for 2015.

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 2014:

Incorporation F
Income statement
For the year ended December 31, 2015
Particulars	Amount ($)	Amount ($)
Service Revenue		$110,000
Operating Expenses:
Salaries Expense	$35,000
Uncollectible Accounts Expense	$839
Total Operating Expenses		($35,839)
Net Income		$74,161

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 2014.

Incorporation F
Statement of changes in the Stockholders Equity
For the year ended December 31, 2015
Particulars	Amount	Amount
Beginning Retained Earnings	$77,250
Add: Net Income	$74,161
Ending Retained Earnings		$151,411
Total Stockholders’ Equity		$151,411

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, 2015:

Incorporation F
Balance sheet
As on December 31, 2015
Particulars	Amount	Amount
Assets
Cash		$133,000
Accounts Receivable	$19,380
Less: Allowance for Doubtful Accounts	($969)	$18,411
Total Assets		$151,411
Liabilities		$0
Stockholders’ Equity
Retained Earnings	$151,411
Total Stockholders’ Equity		$151,411
Total Liabilities and Stockholders’ Equity		$151,411

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 2015:

Incorporation F
Statement of Cash Flows
For the year ended December 31, 2015
Particulars	Amount	Amount
Cash Flows From Operating Activities:
Cash collcetion from Customers	$105,000
Cash paid for Expenses	($35,000)
Net Cash Flow from Operating Activities		$70,000
Cash Flows From Investing Activities		$0
Cash Flows From Financing Activities
Issue of Common Stock		$0
Net Change in Cash		$70,000
Add: Beginning Cash Balance		$63,000
Ending Cash Balance		$133,000

Table (11)

d (c)

To determine

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

Calculate the net realizable value of the accounts receivable at December 31, 2015.

Particulars	Amount
Accounts receivable balance at December 31, 2015	$19,380
Less: Allowance for Doubtful Accounts, December 31, 2015	($969)
Net realizable value of the accounts receivable at December 31, 2015	$18,411

Table (12)

Therefore, the net realizable value of the accounts receivable at December 31, 2015 is $18,411.