Chapter 5, Problem 23P

a)

To determine

Identify whether the given transactions are asset source, asset use, asset exchange, or claims exchange for the year 2014 and 2015.

Explanation of Solution

Identify the type of each transaction for 2014:

Event Number (2014)	Type of Transaction
1. Service revenue earned on account.	Asset Source
2. Collection of accounts receivable.	Asset Exchange
3. Adjusted the accounts to recognize uncollectible accounts expense.	Asset Use

Table (1)

Identify the type of each transaction for 2015:

Event Number (2015)	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.

b)

To determine

Show the effect of each transaction on the elements of the financial statements for 2014 and 2015 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 2014:

Table (3)

Effect of each transaction on the elements using horizontal statement model for 2015:

Table (4)

c.

To determine

Organize the transactions in accounts under an accounting equation for 2014 and 2015.

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 2014:

Table (5)

Organize the transactions in accounts under an accounting equation for 2015:

Table (6)

Working note 1:

Determine the uncollectible account expense for 2014:

Given: The services provided on account are $70,000 and the estimated percentage of uncollectible is 2%.

$\begin{array}{c}\text{Uncollectible accounts expense}=\text{Account receivables}\times \left(\begin{array}{l}\text{Estimated percentage }\\ \text{of uncollectibles}\end{array}\right)\\ =\$70,000\times \frac{2}{100}\\ =\$1,400\end{array}$

Working note 2:

Determine the uncollectible account expense for 2015:

Given: The services provided on account are $84,000 and the estimated percentage of uncollectible is 1%.

$\begin{array}{c}\text{Uncollectible accounts expense}=\text{Account receivables}\times \left(\begin{array}{l}\text{Estimated percentage }\\ \text{of uncollectibles}\end{array}\right)\\ =\$84,000\times \frac{1}{100}\\ =\$840\end{array}$

d)

To determine

Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for 2014 and 2015.

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 2014:

Company EC
Income statement
For the year ended December 31, 2014
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 (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 2014:

Company EC
Statement of changes in stockholders’ equity
For the year ended December 31, 2014
Particulars	Amount	Amount
Beginning common stock	$0
Add: Common stocks issued	$0
Ending common stock		$0
Beginning retained earnings	$0
Add: Net income	$68,600
Ending retained earnings		$68,600
Total stockholders’ equity		$68,600

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 2014:

Company EC
Balance sheet
As of 31st December, 2014
Particulars	Amount	Amount
Assets
Cash		$62,000
Accounts receivable	$8,000
Less: Allowance for doubtful accounts	($1,400)	$6,600
Total assets		$68,600
Liabilities		$0
Stockholders’ equity
Common stock	$0
Retained earnings	$68,600
Total stockholders' equity		$68,600
Total liabilities and stockholders' equity		$68,600

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 2014:

Company EC
Statement of cash flow
For the year ended 31st December, 2014
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		$0
Net change in cash		$62,000
Add: Beginning cash balance		$0
Ending cash balance		$62,000

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 2015:

Company EC
Income statement
For the year ended December 31, 2015
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 (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 2015:

Company EC
Statement of changes in stockholders’ equity
For the year ended December 31, 2015
Particulars	Amount	Amount
Beginning common stock	$0
Add: Common stocks issued	$0
Ending common stock		$0
Beginning retained earnings	$68,600
Add: Net income	$31,960
Ending retained earnings		$100,560
Total stockholders’ equity		$100,560

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 2015:

Company EC
Balance sheet
As of 31st December, 2015
Particulars	Amount	Amount
Assets
Cash		$81,000
Accounts receivable	$20,900
Less: Allowance for doubtful accounts	($1,340)	$19,560
Total assets		$100,560
Liabilities		$0
Stockholders’ equity
Common stock	$0
Retained earnings	$100,560
Total stockholders' equity		$100,560
Total liabilities and stockholders' equity		$100,560

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 2015:

Company EC
Statement of cash flow
For the year ended 31st December, 2015
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		$62,000
Ending cash balance		$81,000

Table (14)