Chapter 7, Problem 17AP

For Year 1:

a.

To determine

Identify whether the given transactions are asset source, asset use, asset exchange, or claims exchange.

Explanation of Solution

Identify the type of each transaction for Year 1:

Event Number (Year 1)	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)

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.

For Year 1:

b.

To determine

Show the effect of each transaction on the elements of the financial statements for Year 1 using horizontal statement model.

Explanation of Solution

Effect of each transaction on the elements using horizontal statement model for Year 1:

Table (2)

For Year 1:

c.

To determine

Record the transactions in general journal and post them to T-accounts for Year 1.

Explanation of Solution

Percentage of revenue allowance method: Credit sales are recorded by debiting (increasing) accounts receivable account. The bad debts is a loss incurred out of credit sales, hence uncollectible accounts can be estimated as a percentage of credit sales or total sales.

It is a method of estimating the bad debts (expected loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of net credit sale (or total sales) for a specific period. Under percentage of sales method, estimated bad debts would be treated as an uncollectible account expense of the particular period.

Record the transactions in general journal:

Date	Event No.	Account title and explanation	Debit ($)	Credit ($)
Year 1	1	Cash	10,000
		Common stock		10,000
		(To record the issue of common stock)
Year 1	2	Accounts receivable	210,000
		Service revenue		210,000
		(To record the service revenue earned on account)
Year 1	3	Cash	162,000
		Accounts receivable		162,000
		(To record the cash collected from accounts receivable)
Year 1	4	Operating expenses	125,000
		Cash		125,000
		(To record the payment made for operating expenses)
Year 1	5	Uncollectible accounts expense (1)	2,100
		Allowance for doubtful accounts		2,100
		(To record the uncollectible accounts expense)

Table (3)

Working note:

Calculate the amount for uncollectible accounts expense:

$\begin{array}{c}\text{Uncollectible accounts expense}=\text{Revenue}\times \text{Percent of sales on account}\\ =\$210,000\times 1\%\\ =\$2,100\end{array}$ (1)

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a) The title of the account

b) The left or debit side

c) The right or credit side

Post the transactions to T-account:

Cash
1.	$10,000	4.	$125,000
3.	$162,000
Ending balance	$47,000

Accounts receivable
2.	$210,000	3.	$162,000
Ending balance	$48,000

Common stock
		1.	$10,000
		Ending balance	$10,000

Service revenue
		2.	$210,000
		Ending balance	$210,000

Allowance for doubtful accounts
		5.	$2,100
		Ending balance	$2,100

Uncollectible accounts expense
5.	$2,100
Ending balance	$2,100

Operating expense
4.	$125,000
Ending balance	$125,000

For Year 1:

d.

To determine

Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Year 1.

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.

Company J
Income statement
For the year ended, Year 1
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 (4)

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.

Company J
Statement of changes in stockholders’ equity
For the year, Year 1
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 (5)

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Prepare the balance sheet.

Company J
Balance sheet
As of 31st December, Year 1
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 (6)

Statement of cash flows: This statement reports all the cash transactions involves for inflow and outflow of cash, and the result of these transactions is reported as an ending balance of cash at the end of reported period.

Prepare the statement of cash flows:

Company J
Statement of cash flow
For the year ended 31st December, Year 1
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 (7)

For Year 1:

e.

To determine

Prepare the closing entries, post them to T-account, and prepare the post-closing trial balance for the Year 1.

Explanation of Solution

Closing entries:

Closing entries are those journal entries, which are passed to transfer the final balances of temporary accounts, (all revenues account, all expenses account and dividend) to the Retained Earnings account. Closing entries produce a zero balance in each temporary account.

Prepare the closing entries.

Account title and explanation		Debit ($)	Credit ($)
Year 1	Service revenue	210,000
	Retained earnings		210,000
	(To record the closing entries for service revenue)
Year 1	Retained earnings	127,100
	Operating expenses		125,000
	Uncollectible accounts expense		2,100
	(To record the closing entry for expenses)

Table (8)

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a) The title of the account

b) The left or debit side

c) The right or credit side

Post the transactions to T-account:

Service revenue
1.	$210,000	Balance	$210,000
		Ending balance	$0

Operating expenses
Balance	$125,000	2.	$125,000
Ending balance	$0

Uncollectible accounts expense
Balance	$2,100	2.	$2,100
Ending balance	$0

Post-closing trial balance:

The post-closing trial balance is a summary of all ledger accounts, and it shows the debit and the credit balances after the closing entries are journalized and posted.  The post-closing trial balance contains only permanent (balance sheet) accounts, and the debit and the credit balances of permanent accounts should agree.

Prepare the post-closing trial balance:

Company J
Post-Closing Trial Balance
December 31, Year 1
Account Title	Debit ($)	Credit ($)
Cash	47,000
Accounts Receivable	48,000
Allowance for Doubtful Accounts		2,100
Common Stock		10,000
Retained Earnings		82,900
Totals	95,000	95,000

Table (9)

For Year 2:

a.

To determine

Identify whether the given transactions are asset source, asset use, asset exchange, or claims exchange.

Explanation of Solution

Identify the type of each transaction for Year 2:

Event Number (Year 2)	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 (10)

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.

For Year 2:

b.

To determine

Show the effect of each transaction on the elements of the financial statements for Year 1 using horizontal statement model.

Explanation of Solution

Effect of each transaction on the elements using horizontal statement model for Year 1:

Table (11)

For Year 2:

c.

To determine

Record the transactions in general journal and post them to T-accounts for Year 2.

Explanation of Solution

Percentage of revenue allowance method: Credit sales are recorded by debiting (increasing) accounts receivable account. The bad debts is a loss incurred out of credit sales, hence uncollectible accounts can be estimated as a percentage of credit sales or total sales.

It is a method of estimating the bad debts (expected loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of net credit sale (or total sales) for a specific period. Under percentage of sales method, estimated bad debts would be treated as an uncollectible account expense of the particular period.

Record the transactions in general journal:

Date	Event No.	Account title and explanation	Debit ($)	Credit ($)
Year 2	1	Accounts receivable	320,000
		Service revenue		320,000
		(To record the service revenue on account)
Year 2	2	Cash	335,000
		Accounts receivable		335,000
		(To record the collection made from accounts receivable)
Year 2	3	Allowance for doubtful accounts	2,150
		Accounts receivable		2,150
		(To record the write off allowance for doubtful accounts)
Year 2	4.a	Accounts receivable	800
		Allowance for doubtful accounts		800
		(To reinstate the written off accounts )
Year 2	4.b	Cash	800
		Accounts receivable		800
		(To record the recovered portion of uncollectible)
Year 2	5	Operating expenses	205,000
		Cash		205,000
		(To record the entry for payment of operating expenses)
Year 2	6	Uncollectible accounts expense (2)	1,600
		Allowance for doubtful accounts		1,600
		(To record the uncollectible accounts expense)

Table (12)

Working note:

Calculate the amount for uncollectible accounts expense:

$\begin{array}{c}\text{Uncollectible accounts expense}=\text{Revenue}\times \text{Percent of sales on account}\\ =\$320,000\times 0.5\%\\ =\$1,600\end{array}$ (2)

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a) The title of the account

b) The left or debit side

c) The right or credit side

Post the transactions to T-account:

Cash
Balance	$47,000	5.	$205,000
2.	$335,000
4b.	$800
3.	$162,000
Ending balance	$177,800

Accounts receivable
Balance	$48,000	2.	$335,000
1.	$320,000	3.	$2,150
4a.	$800	4b.	$800
Ending balance	$30,850

Common stock
		Balance	$10,000
		Ending balance	$10,000
Service revenue
		1.		$320,000
		Ending balance		$320,000

Retained earnings
		Balance	$82,900
		Ending balance	$82,900
Allowance for doubtful accounts
3.	$2,150	Balance	$2,100
		4a.	$800
		6.	$1,600
		Ending balance	$2,350

Uncollectible accounts expense
6.	$1,600
Ending balance	$1,600

Operating expense
5.	$205,000
Ending balance	$205,000

For Year 2:

d.

To determine

Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for the Year 2.

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 the income statement:

Company J
Income statement
For the year ended, Year 2
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 (13)

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:

Company J
Statement of changes in stockholders’ equity
For the year, Year 2
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 (14)

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Prepare the balance sheet:

Company J
Balance sheet
As of 31st December, Year 2
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 (15)

Statement of cash flows: This statement reports all the cash transactions involves for inflow and outflow of cash, and the result of these transactions is reported as an ending balance of cash at the end of reported period.

Prepare the statement of cash flows:

Company J
Statement of cash flow
For the year ended 31st December, Year 2
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 (16)

For Year 2:

e.

To determine

Prepare the closing entries, post them to T-accounts and prepare the post-closing trial balance.

Explanation of Solution

Closing entries:

Closing entries are those journal entries, which are passed to transfer the final balances of temporary accounts, (all revenues account, all expenses account and dividend) to the Retained Earnings account. Closing entries produce a zero balance in each temporary account.

Prepare the closing entries:

Date	Event No.	Account title and explanation	Debit ($)	Credit ($)
Year 2	1	Service revenue	320,000
		Retained earnings		320,000
		(To record the closing entries for service revenue)
Year 2	2	Retained earnings	206,600
		Operating expenses		205,000
		Uncollectible accounts expense		1,600
		(To record the closing entry for expenses)

Table (17)

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a) The title of the account

b) The left or debit side

c) The right or credit side

Post the transactions to T-account:

Service revenue
1.	$320,000	Balance	$320,000
		Ending balance	$0

Retained earnings
2.	$206,600	Balance	$82,900
		1.	$320,00
		Ending balance	$196,300
Operating expenses
Balance	$205,000	2.	$205,000
Ending balance	$0

Uncollectible accounts expense
Balance	$1,600	2.	$1,600
Ending balance	$0

Post-closing trial balance:

The post-closing trial balance is a summary of all ledger accounts, and it shows the debit and the credit balances after the closing entries are journalized and posted.  The post-closing trial balance contains only permanent (balance sheet) accounts, and the debit and the credit balances of permanent accounts should agree.

Prepare the post-closing trial balance:

Company J
Post-Closing Trial Balance
December 31, Year 2
Account Title	Debit ($)	Credit ($)
Cash	177,800
Accounts Receivable	30,850
Allowance for Doubtful Accounts		2,350
Common Stock		10,000
Retained Earnings		193,600
Totals	208,650	208,650

Table (18)