Chapter 7, Problem 26BP

a.

To determine

Prepare the general journal entry and post the entries to T-account, an income statement, statement of changes in stockholders’ equity, a balance sheet, and a statement of cash flows for Year 2.

Explanation of Solution

Allowance method: It is a method for accounting bad debt expense, where amount of uncollectible accounts receivables are estimated and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for doubtful account.

Prepare the journal entries.

Event	Account Titles and explanation	Debit ($)	Credit ($)
1.	Merchandise Inventory	260,000
	Accounts Payable		260,000
	(To receord the purchase of inventories on account)
2a.	Accounts Receivable	340,000
	Sales Revenue		340,000
	(To record the sales made on account)
2b.	Cost of Goods Sold	243,000
	Merchandise Inventory		243,000
	(To record the cost of goods sold)
3	Cash	80,000
	Service Revenue		80,000
	(To record the service revenue)
4a.	Accounts Receivable	57,000
	Credit Card Expense $\left(\$60,000\times 5\%\right)$	3,000
	Sales Revenue		60,000
	(To record the credit card sales)
4b.	Cost of Goods Sold	41,250
	Merchandise Inventory		41,250
	(To record the cost of goods sold)
5.	Cash	348,000
	Accounts Receivable		348,000
	(To record the cash collected  from accounts receivable)
6.	Accounts Payable	265,000
	Cash		265,000
	(To record the cash payment made for accounts payable)
7.	Selling and Administrative Expenses	115,000
	Cash		115,000
	(To record the payment made for selling and administrative expenses)
8.	Cash	57,000
	Accounts Receivable		57,000
	(To record the collection of cash for the sales made on account in event 4)
9.	Notes receivable	50,000
	Cash		50,000
	(To record the notes receivable)
10.	Allowance for doubtful accounts	830
	Accounts receivable		830
	(To record the allowance for doubtful accounts)
11.a.	Interest receivable (1)	1,125
	Interest revenue		1,125
	(To record the revenue from interest)
11.b	Uncollectible accounts expense (2)	1,700
	Allowance for doubtful debts		1,700
	(To record the uncollectible accounts expense)

Table (1)

Working note:

Calculate the amount of interest receivable.

$\begin{array}{c}\text{Total interest}=\text{Loan amount}\times \text{Rate of interest}\\ =\$50,000\times 9\%\\ =\$4,500(\text{A)}\end{array}$

Calculate the amount of interest receivable.

$\begin{array}{c}\text{Interest receivable}=\text{Total interest}\times \frac{\text{Number of months}}{\text{Months in a year}}\\ =\$4,500(\text{A)}\times \frac{3}{12}\left(\text{Matruity period}\right)\\ =\$1,125\end{array}$ (2)

Calculate the amount for uncollectible accounts expense.

$\begin{array}{c}\text{Uncollectible accounts expense}=\text{Accounts receivable}\times \text{Rate of interest}\\ =\$340,000\times 0.5\%\\ =\$1,700\end{array}$ (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
Beginning balance	$46,200	6.	$265,000
3.	$80,000	7.	$115,000
5.	$348,000	9.	$50,000
8.	$57,000
Ending balance	$342,000

Accounts receivable
Beginning balance	$21,300	5.	$348,000
2a.	$340,000	10.	$830
Ending balance	$12,470

Accounts receivable-CC
4a.	$57,000	8.	$57,000
Ending balance	$0

Allowance for doubtful accounts
		Beginning balance	$1,350
10.	$830	11b.	$1,700
		Ending balance	$2,220

Merchandise inventory
Beginning balance	$85,600	2b.	$420,000
1.	$260,000	4b.	$41,250
Ending balance	$61,350

Notes receivable
9.	$50,000
Ending balance	$50,000

Interest receivable
11a.	$1,125
Ending balance	$1,125

Accounts payable
6.	$265,000	Beginning balance	$28,000
		1.	$260,000
		Ending balance	$260,000

Common stock
		Balance	$80,000

Retained earnings
		Balance	$43,750

Sales revenue
		2a.	$340,000
		4a.	$60,000
		Ending balance	$400,000

Cost of goods sold
2b.	$243,000
4b.	$41,250
Ending balance	$284,250

Credit card expense
4a.	$3,000
Ending balance	$3,000

Selling and administrative expense
7.	$115,000
Ending balance	$115,000
Uncollectible accounts expense
11b.	$1,700
Ending balance	$1,700

Interest revenue
		11a.	$1,125
		Ending balance	$1,125

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 VCSS
Income statement
For the year ended 31st December, Year 2
Particulars	Amount($)	Amount ($)
Revenue
Sales revenue	400,000
Service revenue	80,000
Total revenue		480,000
Less: Cost of goods sold		284,250
Gross profit		195,750
Less:  Operating Expenses
Credit card expenses	3,000
Selling and administrative expenses	115,000
Uncollectible accounts expense	1,700
Total Operating Expenses		119,700
Operating income		76,050
Add: Non-operating items
Interest revenue		1,125
Net income		77,175

Table (2)

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 VCSS
Statement of changes in stockholders’ equity
For the year ended 31st December, Year 2
Particulars	Amount ($)	Amount ($)
Beginning common stock	80,000
Add: Common stocks issued	0
Ending common stock		80,000
Beginning retained earnings	43,750
Add: Net income	77,175
Less: Dividends	0
Ending retained earnings		120,925
Total stockholders’ equity		200,925

Table (3)

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 VCSS
Balance sheet
As of 31st December, Year 2
Particulars	Amount ($)	Amount ($)
Assets
Cash		101,200
Accounts receivable	12,470
Less: Allowance for doubtful accounts	2,220	10,250
Merchandise inventory		61,350
Interest receivable		1,125
Notes receivable		50,000
Total assets		223,925
Liabilities
Accounts payable	23,000
Total liabilities		23,000
Stockholders’ equity
Common stock	80,000
Retained earnings	120,925
Total stockholders' equity		200,925
Total liabilities and stockholders' equity		223,925

Table (4)

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 VCSS
Statement of cash flow
For the year ended 31st December, Year 2
Particulars	Amount ($)	Amount ($)
Cash flow from operating activities:
Inflow from customers (3)	485,000
Outflow for inventory	(265,000)
Outflow for expenses	(115,000)
Net cash flow from operating activities		105,000
Cash flow from investing activities
Outflow for notes receivable	(50,000)
Net cash flow from investing activities		(50,000)
Cash flow from financing activities		0
Net change in cash		55,000
Add: Beginning cash balance		46,200
Ending cash balance		101,200

Table (5)

Working note:

Calculate the amount of inflow from customers.

$\begin{array}{c}\text{Total inflow from customers}=\left(\begin{array}{l}\text{Cash sales+}\\ \text{Collection from accounts receivable}+\\ \text{Credit card sales collection}\end{array}\right)\\ =\$80,000+\$348,000+\$57,000\\ =\$485,000\end{array}$ (3)