Chapter 5, Problem 22E

1.

To determine

Prepare journal entries to record each transaction of Fireworks P.

Explanation of Solution

1.

Prepare journal entry to record provide additional service on account for $7,000.

Date	Account titles and Explanation	Debit	Credit
	Accounts receivable	$7,000
	Service revenue		$7,000
	(To record service provided on account)

Table (1)

• Accounts receivable is a current asset, and it is increased. Therefore, debit accounts receivable account for $7,000.
• Service revenue is a component of stockholders’ equity, and it is increased. Therefore, credit service revenue account for $7,000.

2.

Prepare journal entry to record receive cash from customers within 10 days of the services being provided on account.

Date	Account titles and Explanation	Debit	Credit
	Cash	$4,900
	Sales discount (1)	$100
	Account receivable		$5,000
	(To record cash received on account with sales discount)

Table (2)

Working note:

Calculate sales discount.

$\begin{array}{c}\text{Sales discount}\text{=}\text{Accounts receivable }\times \text{discount rate}\\ \text{=}\text{\$5,000}\times \text{2\%}\\ \text{=}\text{\$100}\end{array}$

(1)

• Cash is a current asset, and it is increased. Therefore, debit cash account for $4,900.
• Sales discount is a contra revenue account, and it is increased. Therefore, debit sales discount account for $100.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $5,000.

3.

Prepare journal entry to record write off customer accounts of $1,500 as uncollectible.

Date	Account titles and Explanation	Debit	Credit
	Allowance for uncollectible accounts	$1,500
	Accounts receivable		$1,500
	(To record write off uncollectible accounts)

Table (3)

Allowance for uncollectible accounts is a contra asset, and it is decreased. Therefore, debit allowance for uncollectible accounts for $1,500.

Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $1,500.

2.

To determine

Prepare adjusting entries as on December 31 of Fireworks P.

Explanation of Solution

a.

Prepare adjusting entry to record uncollectible accounts.

Date	Account titles and Explanation	Debit	Credit
December 31	Bad debt expense	$3,500
	Allowance for uncollectible accounts		$3,500
	(To record adjustment entry of uncollectible accounts)

Table (4)

Working notes:

Calculate ending bad debt expense.

$\begin{array}{c}\begin{array}{l}\text{Ending bad }\\ \text{debt expense}\end{array})\text{=}\left(\begin{array}{l}\left[\begin{array}{l}\text{Accounts receivable }-\text{Allowance for}\\ \text{ uncollectible accounts}\end{array}\right]\times \text{Estimated percentage}\text{of bad debts}\\ -\text{Ending balance of allowance for uncollectible accounts}\end{array}\right)\\ \text{=}\left(\left[\$41,500+\$7,000-\$5,000\right]-\$1,500\right)\times 10\%-\left(\$2,200-\$1,500\right)\\ =\$42,000\times 10\%-\$700\\ =\$3,500\end{array}$

(2)

• Bad debt expense is a component of stockholders’ equity, and it is decreased. Therefore, debit bad debts expense account for $3,500.
• Allowance for uncollectible accounts is a contra asset, and it is increased. Therefore, credit allowance for uncollectible accounts for $3,500.

b.

Prepare adjustment entry to record interest receivable.

Date	Account titles and Explanation	Debit	Credit
December 31	Interest receivable	$200
	Interest revenue		$200
	(To record adjustment entry of interest receivable)

Table (5)

• Interest receivable is a current asset, and it is increased. Therefore, debit interest receivable account for $200.
• Interest revenue is a component of stockholders’ equity, and it is increased. Therefore, credit interest revenue account for $200.

3.

To determine

Prepare adjusted trail balance as on 31^st December 2021 of Fireworks P.

Explanation of Solution

Prepare adjusted trail balance as on 31^st December 2021 of Fireworks P as follows:

Fireworks' P
Adjusted Trial Balance
December 31 2021
Accounts	Debit ($)	Credit ($)
Cash	26,100
Accounts Receivable	42,000
Allowance for Uncollectible Accounts		4,200
Interest Receivable	200
Supplies	6,700
Notes Receivable	10,000
Land	85,000
Accounts Payable		12,300
Common Stock		106,000
Retained Earnings		29,900
Service Revenue		131,800
Sales Discounts	100
Interest Revenue		200
Salaries Expense	70,900
Utilities Expense	24,200
Supplies Expense	15,700
Bad Debt Expense	3,500
Totals	284,400	284,400

Table (6)

Working notes:

Calculate ending cash balance.

$\begin{array}{c}\text{Ending cash balance}\text{=}\text{Opening balance + Entries during the year}\\ \text{=}\text{\$21,200}\text{+\$4,900}\\ \text{=}\text{\$26,100}\end{array}$

(3)

Calculate ending balance of accounts receivable.

$\begin{array}{c}\begin{array}{l}\text{Ending cash balance}\\ \text{ of accounts receivable}\end{array})\text{ =}\text{Opening balance + Entries during the year}\\ \text{=}\text{\$41,500}\text{+}\left(\$7,000-5,000-\$1,500\right)\\ =\$42,000\end{array}$

(4)

Calculate ending balance of allowance for uncollectible accounts.

$\begin{array}{c}\begin{array}{l}\text{Ending balance of allowance}\\ \text{ for uncollectible accounts}\end{array})\text{=}\text{Opening balance}-\text{Entries during the year}\text{+Adjustment amount}\\ \text{=}\text{\$2,200}-\$1,500+\$3,500\\ =\$4,200\end{array}$

(5)

Calculate ending balance of service revenue.

$\begin{array}{c}\text{Ending balance of service revenue}\text{=}\text{Opening balance + Entries during the year}\\ \text{=}\text{\$124,800}\text{+\$7,000}\\ \text{=}\text{\$131,800}\end{array}$

(6)

4.

To determine

Prepare income statement for the period ended December 31, 2021.

Explanation of Solution

Prepare income statement for the period ended December 31, 2021 as follows:

Fireworks P
Income Statement
For the year ended December 31, 2021
	Amount ($)
Revenues:
Service revenue	131,800
Sales Discounts	(100)
Interest revenue	200
Net revenues	131,900
Less: Expenses:
Salaries Expense	70,900
Utilities Expense	24,200
Supplies Expense	15,700
Bad debt expense	3,500
Total expenses	114,300
Net income	17,600

Table (7)

5.

To determine

Prepare classified balance sheet as on December 31, 2021.

Explanation of Solution

Prepare classified balance sheet as on December 31, 2021 as follows:

Figure (1)

6.

To determine

Record closing entries of Fireworks P.

Explanation of Solution

Prepare closing entry of revenue accounts.

Date	Account titles and Explanation	Debit	Credit
31 December 2021	Service revenue	$131,580
	Interest revenue	$200
	Sales discount		$100
	Retained earnings		$131,900
	(To record close revenue accounts)

Table (8)

• Service revenue is a component of stock holders’ equity and decreased it. So debit service revenue account for $131,580.
• Interest revenue is a component of stock holders’ equity and decreased it.  So debit the interest revenue account for $200.
• Sales discount is a contra revenue account, and it is decreased. Therefore, credit sales discount account for $100.
• Retained earnings are a liability and increased it. So credit the retained earnings account for $131,900.

Prepare closing entry to record expense accounts.

Date	Account titles and Explanation	Debit	Credit
31 December 2021	Retained earnings	$114,300
	Utilities expense		$24,200
	Salaries expense		$70,900
	Supplies expense		$15,700
	Bad debt expense		$3,500
	(To record close expense accounts)

Table (9)

• Retained earnings are a liability and decreased it. So debit the retained earnings.
• Supplies expenses are an expense which is a component of stock holder’s equity and decreases it. So credit the supplies expense account.
• Salaries expenses are an expense which is a component of stock holder’s equity and decreases it. So credit the salaries expense account.
• Utilities expenses are an expense which is a component of stock holder’s equity and decreases it. So credit the utilities expense account.
• Bad debt expenses are an expense which is a component of stock holder’s equity and decreases it. So credit the bad debt expense account.

7.a.

To determine

Identify the bad debts expense for the year 2021.

Explanation of Solution

Calculate bad debts expense.

$\begin{array}{c}\text{Bad debts expense =}\text{Net income }-\text{Future uncollectible accounts}\\ \text{=}\text{\$17,600}-\$14,100\\ =\$3,500\end{array}$

b.

To determine

Identify the ending balance of allowance for uncollectible accounts.

Explanation of Solution

Calculate ending balance of allowance for uncollectible accounts.

$\begin{array}{c}\begin{array}{l}\text{Ending balance of allowance}\\ \text{ for uncollectible accounts}\end{array})\text{=}\text{Opening balance}-\text{Entries during the year}\text{+Adjustment amount}\\ \text{=}\text{\$2,200}-\$1,500+\$3,500\\ =\$4,200\end{array}$

c.

To determine

Identify the expected cash collected from the customers amount.

Explanation of Solution

Calculate expected cash collected.

$\begin{array}{c}\text{Expected cash collected =}\text{Accounts receivable }-\text{Allowance for uncollectible accounts}\\ \text{=}\text{\$42,000}-\$4,200\\ =\$37,800\end{array}$