Chapter 5, Problem 22P

Accounting for uncollectible accounts—two cycles using the percent of revenue allowance method

The following transactions apply to Jova Company for 2018, the first year of operation:

1. 1. Issued $10,000 of common stock for cash.
2. 2. Recognized $210,000 of service revenue earned on account.
3. 3. Collected $162,000 from accounts receivable.
4. 4. Paid operating expenses of $125,000.
5. 5. Adjusted accounts to recognize uncollectible accounts expense. Jova uses the allowance method of accounting for uncollectible accounts and estimates that uncollectible accounts expense will be 1 percent of sales on account.

The following transactions apply to Jova for 2019:

1. 1. Recognized $320,000 of service revenue on account.
2. 2. Collected $335,000 from accounts receivable.
3. 3. Determined that $2,150 of the accounts receivable were uncollectible and wrote them off.
4. 4. Collected $800 of an account that had previously been written off.
5. 5. Paid $205,000 cash for operating expenses.
6. 6. Adjusted the accounts to recognize uncollectible accounts expense for 2019. Jova estimates uncollectible accounts expense will be 0.5 percent of sales on account.

Required

Complete the following requirements for 2018 and 2019. Complete all requirements for 2018 prior to beginning the requirements for 2019.

1. a. Identify the type of each transaction (asset source, asset use, asset exchange, or claims exchange).
2. b. Show the effect of each transaction on the elements of the financial statements, using a horizontal statements model like the one shown here. Use + for increase, − for decrease, and NA for not affected. Also, in the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). The first transaction is entered as an example. (Hint: Closing entries do not affect the statements model.)

1. c. Organize the transaction data in accounts under an accounting equation.
2. d. Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows.

To determine

Identify whether the given transactions are asset source, asset use, asset exchange, or claims exchange for the year 2018 and 2019.

Explanation of Solution

Identify the type of each transaction for 2018:

Event Number (2018)	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. Payment made for operating expenses.	Asset Use
5. Adjusted the accounts to recognize uncollectible accounts expense.	Asset Use

Table (1)

Identify the type of each transaction for 2019:

Event Number (2019)	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 (2)

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.

To determine

Show the effect of each transaction on the elements of the financial statements for 2018 and 2019 using horizontal statement model.

Explanation of Solution

Horizontal statements model: The model that represents all the financial statements, balance sheet, income statement, and statement of cash flows in one table in a horizontal form, is referred to as, horizontal statements model.

Effect of each transaction on the elements using horizontal statement model for 2018:

Table (3)

Effect of each transaction on the elements using horizontal statement model for 2019:

Table (4)

To determine

Organize the transactions in accounts under an accounting equation for 2018 and 2019.

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 for 2018:

Table (5)

Organize the transactions in accounts under an accounting equation for 2019:

Table (6)

Working note 1:

Determine the uncollectible account expense for 2018:

Given: The services provided on account are $210,000 and the estimated percentage of uncollectible is 1%.

$\begin{array}{c}\text{Uncollectible accounts expense}=\text{Account receivables}\times \left(\begin{array}{l}\text{Estimated percentage }\\ \text{of uncollectibles}\end{array}\right)\\ =\$210,000\times \frac{1}{100}\\ =\$2,100\end{array}$

Working note 2:

Determine the uncollectible account expense for 2019:

Given: The services provided on account are $210,000 and the estimated percentage of uncollectible is 0.5%.

$\begin{array}{c}\text{Uncollectible accounts expense}=\text{Account receivables}\times \left(\begin{array}{l}\text{Estimated percentage }\\ \text{of uncollectibles}\end{array}\right)\\ =\$320,000\times \frac{0.5}{100}\\ =\$1,600\end{array}$

To determine

Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for 2018 and 2019.

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 an income statement for the year 2018:

Company J
Income statement
For the year ended December 31, 2018
Particulars	Amount	Amount
Revenue
Service revenue	$210,000
Total revenues		$210,000
Less: Expenses
Operating expense	$125,000
Uncollectible accounts expense	$2,100
Total expenses		$127,100
Net income		$82,900

Table (7)

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 for the year 2018:

Company J
Statement of changes in stockholders’ equity
For the year ended December 31, 2018
Particulars	Amount	Amount
Beginning common stock	$10,000
Add: Common stocks issued	$0
Ending common stock		$10,000
Beginning retained earnings	$0
Add: Net income	$82,900
Less: Dividends	$0
Ending retained earnings		$82,900
Total stockholders’ equity		$92,900

Table (8)

Balance sheet: Balance Sheet is one of the financial statements that summarize 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 for the year 2018:

Company J
Balance sheet
As of 31st December, 2018
Particulars	Amount	Amount
Assets
Cash		$47,000
Accounts receivable	$48,000
Less: Allowance for doubtful accounts	($2,100)	$45,900
Total assets		$92,900
Liabilities		$0
Stockholders’ equity
Common stock	$10,000
Retained earnings	$82,900
Total stockholders' equity		$92,900
Total liabilities and stockholders' equity		$92,900

Table (9)

Statement of Cash flows: Statement of cash flows is a statement 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 the year 2018:

Company J
Statement of cash flow
For the year ended 31st December, 2018
Particulars	Amount	Amount
Cash flow from operating activities:
Inflow from customers	$162,000
Outflow from customers	($125,000)
Net cash flow from operating activities		$37,000
Cash flow from investing activities		$0
Cash flow from financing activities
Inflow from issue of common stock	$10,000
Net cash flow from financing activities		$10,000
Net change in cash		$47,000
Add: Beginning cash balance		$0
Ending cash balance		$47,000

Table (10)

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 for 2019:

Company J
Income statement
For the year ended December 31, 2019
Particulars	Amount	Amount
Revenue
Service revenue	$320,000
Total revenues		$320,000
Less: Expenses
Operating expense	$205,000
Uncollectible accounts expense	$1,600
Total expenses		($206,600)
Net income		$113,400

Table (11)

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 for 2019:

Company J
Statement of changes in stockholders’ equity
For the year ended December 31, 2019
Particulars	Amount	Amount
Beginning common stock	$10,000
Add: Common stocks issued	$0
Ending common stock		$10,000
Beginning retained earnings	$82,9000
Add: Net income	$113,400
Less: Dividends	($0)
Ending retained earnings		$196,300
Total stockholders’ equity		$206,300

Table (12)

Balance sheet: Balance Sheet is one of the financial statements that summarize 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 for 2019:

Company J
Balance sheet
As of 31st December, 2019
Particulars	Amount	Amount
Assets
Cash		$177,800
Accounts receivable	$30,850
Less: Allowance for doubtful accounts	($2,350)	28,500
Total assets		$206,300
Liabilities		$0
Stockholders’ equity
Common stock	$10,000
Retained earnings	$196,300
Total stockholders' equity		$206,300
Total liabilities and stockholders' equity		$206,300

Table (13)

Statement of Cash flows: Statement of cash flows is a statement 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:

Company J
Statement of cash flow
For the year ended 31st December, 2019
Particulars	Amount	Amount
Cash flow from operating activities:
Inflow from customers	$335,800
Outflow from customers	($205,000)
Net cash flow from operating activities		$130,800
Cash flow from investing activities		$0
Cash flow from financing activities		$0
Net change in cash		$130,800
Add: Beginning cash balance		$47,000
Ending cash balance		$177,800

Table (14)