Chapter 7, Problem 7AE

a.

To determine

Prepare the journal entries for Year 1 events and post them to T-accounts.

Answer to Problem 7AE

Prepare the journal entries for Year 1 events

Date	Accounts title and explanation	Post ref	Debit ($)	Credit ($)
1.	Cash		10,000
	Common Stock			10,000
	(To record the issue of common stock)
2.	Accounts Receivable		78,000
	Service Revenue			78,000
	(To record the service revenue)
3.	Cash		36,000
	Service Revenue			36,000
	(To record cash collection)
4.	Cash		69,000
	Accounts Receivable			69,000
	(To record the cash collection from custmors)
5.	Salaries Expense		38,000
	Cash			38,000
	(To record the salaries expenses)
6.	Uncollectible Accounts Expense (1)		450
	Allowance for Doubtful Accounts			450
	(To record the bad debt expense)
7.	Service Revenue		114,000
	Retained Earnings			114,000
	(To close the revenue account)
8.	Retained Earnings		38,450
	Uncollectible Accounts Exp.			450
	Salaries Expense			38,000
	(To close the expense account)

Table (1)

Prepare the T-accounts and post the journal entries to T-accounts.

Cash
Beginning Balance	0
1. Common stock	10,000
2. Service revenue	36,000
4. Accounts receivables	69,000	5. Salaries expense	38,000
Ending Balance	77,000

	Accounts receivable
Beginning Balance		0	3. Collections	69,000
1. Service on account		78,000
Ending Balance		9,000

Allowance for doubtful accounts
		5. Uncollectible accounts expense (1)	450
		Ending Balance	450

Common stock
		1. Cash	10,000
		Ending Balance	10,000

Retained earnings
Beginning Balance	0
7. Closing entry	38,450	6. Closing entry	114,000
		Ending Balance	75,550

Service revenue
6. Closing entry	114,000	1. Service on account 2. Cash service	78,000 36,000
		Ending Balance	0

Salaries expense
4. Cash	38,000	7. Closing entry	38,000
		Ending Balance	0

Uncollectible accounts expense
5. allowance for doubtful accounts	450	7. Closing entry	450
		Ending Balance	0

Explanation of Solution

Accounts receivable:

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Bad debt expense:

Bad debt expense is an expense account. The amounts of loss incurred from extending credit to the customers are recorded as bad debt expense. In other words, the estimated uncollectible accounts receivable are known as bad debt expense.

Allowance for Uncollectible account:

It is a contra-asset, related to accounts receivable, which holds the estimated amount of uncollectible receivables (bad debts).

Retained earnings:

Retained earnings are the portion of earnings kept by the business for the purpose of reinvestments, payment of debts, or for future growth. In other words, Accumulated amount of all net income less the accumulated amount of dividends declared till date is known as retained earnings.

Service Revenue:

Service Revenue is considered as the income received from the service provided to the customers during the accounting period.

Common stock:

These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.

Calculate the bad debt expense.

Bad debts are estimated 5% of the ending accounts receivables balance. Ending accounts receivable are $9,000

$\begin{array}{c}\text{Bad debt expense}\text{= Revenue earned on account }\times \text{ 5\%}\\ \text{=}\text{\$9,000}\times 5\text{\%}\\ \text{=}\text{\$450}\end{array}$ (1)

b.

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:

It is one of the financial statements, 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.

Prepare the income statement for Year 1.

Incorporation L
Income statement
For the year ended December 31, Year 1
Particulars	Amount ($)	Amount ($)
Service Revenue		$114,000
Operating Expenses:
Salaries Expense	$38,000
Uncollectible Accounts Expense	450
Total Operating Expenses		(38,450)
Net Income		$75,550

Table (2)

Statement of stockholder's equity:

This statement reports the beginning stockholder's equity and all the changes which led to ending stockholder's equity. Additional capital, net income from income statement is added to and dividends are deducted from beginning stockholder's equity to arrive at the end result, closing balance of stockholder's equity.

Prepare the statement of changes in the stockholders equity for Year 1.

Incorporation L
Statement of changes in the Stockholders Equity
For the year ended December 31, Year 1
Particulars	Amount ($)	Amount ($)
Beginning Common Stock	0
Add: Common Stock Issued	10,000
Ending Common Stock		$10,000
Beginning Retained Earnings	0
Add: Net Income	75,550
Ending Retained Earnings		$75,550
Total Stockholders’ Equity		$85,550

Table (3)

Balance Sheet:

Balance Sheet summarizes 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 as on December 31, Year 1.

Incorporation L
Balance sheet
As on December 31, Year 1
Particulars	Amount ($)	Amount ($)
Assets
Cash		$77,000
Accounts Receivable	$9,000
Less: Allowance for Doubtful Accounts	(450)	8,550
Total Assets		$85,550
Liabilities		$0
Stockholders’ Equity
Common Stock	$10,000
Retained Earnings	75,550
Total Stockholders’ Equity		85,550
Total Liabilities and Stockholders’ Equity		$85,550

Table (4)

Statement of cash flows:

It is one of the financial statements which 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 Year 1.

Incorporation L
Statement of Cash Flows
For the year ended December 31, Year 1
Particulars	Amount ($)	Amount ($)
Cash Flows From Operating Activities:
Cash collcetion from Customers	$105,000
Cash paid for Expenses	(38,000)
Net Cash Flow from Operating Activities		$67,000
Cash Flows From Investing Activities		0
Cash Flows From Financing Activities
Issue of Common Stock		10,000
Net Change in Cash		77,000
Add: Beginning Cash Balance		0
Ending Cash Balance		$77,000

Table (5)

c.

To determine

Calculate the net realizable value of the accounts receivable at December 31, Year 1.

Explanation of Solution

Calculate the net realizable value of the accounts receivable at December 31, Year 1.

Particulars	Amount ($)
Accounts receivable balance at December 31, Year 1	9,000
Less: Allowance for Doubtful Accounts, December 31, Year 1	(450)
Net realizable value of the accounts receivable at December 31, Year 1	8,550

Table (6)

Therefore, the net realizable value of the accounts receivable at December 31, Year 1 is $8,550.

d (a)

To determine

Prepare the journal entries for Year 2 events and post them to T-accounts.

Answer to Problem 7AE

Prepare the journal entries for Year 2 events

Date	Accounts title and explanation	Post ref	Debit ($)	Credit ($)
1.	Allowance for Doubtful Accounts		650
	Accounts Receivable			650
	(To record the write off an uncollectible accounts)
2.	Accounts Receivable		88,000
	Service Revenue			88,000
	(To record the service revenue)
3.	Cash		32,000
	Service Revenue			32,000
	(To record the service revenue)
4.	Cash		81,000
	Accounts Receivable			81,000
	(To record the cash collection from custmors)
5.	Salaries Expense		65,000
	Cash			65,000
	(To record the salaries expenses)
6.	Uncollectible Accounts Expense (2)		968
	Allowance for Doubtful Accounts			968
	(To record the bad debt expense)

Table (7)

Prepare the T-accounts and post the journal entries to T-accounts.

Cash
Beginning Balance	77,000
3. Service revenue	32,000
4. Accounts receivables	81,000	5. Salaries expense	65,000
Ending Balance	125,000

	Accounts receivable
Beginning Balance		9,000	1. Write-off	650
2. Service on account		88,000	4. Collections	81,000
Ending Balance		15,350

Allowance for doubtful accounts
		Beginning Balance	450
1. Write-off	650	6. Uncollectible account expense (1)	968
		Ending Balance	768

Common stock
		Beginning Balance	10,000
		Ending Balance	10,000

Retained earnings
		Beginning Balance	75,550
		Ending Balance	75,550

Service revenue
		2. Service on account 3. Cash service	88,000 32,000
		Ending Balance	120,000

Salaries expense
5. Cash	65,000
Ending Balance	65,000

Uncollectible accounts expense
6. allowance for doubtful accounts	968
Ending Balance	968

Explanation of Solution

Calculate the bad debt expense

Bad debts are estimated 5% of the ending accounts receivables balance. Ending accounts receivable are $15,350

$\begin{array}{c}\text{Bad debt expense}\text{= }\left(\text{Revenue on Account }\times \text{ 5\%}\right)+\text{Beginning balance}-\text{write-off amount}\\ \text{=}\left(\text{\$15,350}\times 5\text{\%}\right)+\$450-\$650\\ \text{=}\text{\$768}+\$450-\$650\\ =\$968\end{array}$ (2)

d (b)

To determine

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

Explanation of Solution

Income statement:

It is one of the financial statements, 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.

Prepare the income statement for Year 1.

Incorporation L
Income statement
For the year ended December 31, Year 2
Particulars	Amount ($)	Amount ($)
Service Revenue		$120,000
Operating Expenses:
Salaries Expense	$65,000
Uncollectible Accounts Expense	968
Total Operating Expenses		(65,968)
Net Income		$54,032

Table (8)

Statement of stockholder's equity:

This statement reports the beginning stockholder's equity and all the changes which led to ending stockholder's equity. Additional capital, net income from income statement is added to and dividends are deducted from beginning stockholder's equity to arrive at the end result, closing balance of stockholder's equity.

Prepare the statement of changes in the stockholders equity for Year 1.

Incorporation L
Statement of changes in the Stockholders Equity
For the year ended December 31, Year 2
Particulars	Amount ($)	Amount ($)
Beginning Common Stock	10,000
Add: Common Stock Issued	0
Ending Common Stock		$10,000
Beginning Retained Earnings	75,550
Add: Net Income	54,032
Ending Retained Earnings		$129,582
Total Stockholders’ Equity		$139,582

Table (9)

Balance Sheet:

Balance Sheet summarizes 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 as on December 31, Year 2.

Incorporation L
Balance sheet
As on December 31, Year 2
Particulars	Amount ($)	Amount ($)
Assets
Cash		$125,000
Accounts Receivable	$15,350
Less: Allowance for Doubtful Accounts	(768)	14,582
Total Assets		$139,582
Liabilities		$0
Stockholders’ Equity
Common Stock	$10,000
Retained Earnings	129,582
Total Stockholders’ Equity		139,582
Total Liabilities and Stockholders’ Equity		$139,582

Table (4)

Statement of cash flows:

It is one of the financial statements which 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 Year 2.

Incorporation L
Statement of Cash Flows
For the year ended December 31, Year 2
Particulars	Amount ($)	Amount ($)
Cash Flows From Operating Activities:
Cash collcetion from Customers	$113,000
Cash paid for Expenses	(65,000)
Net Cash Flow from Operating Activities		$48,000
Cash Flows From Investing Activities		0
Cash Flows From Financing Activities
Issue of Common Stock		0
Net Change in Cash		48,000
Add: Beginning Cash Balance		77,000
Ending Cash Balance		$125,000

Table (5)

d (c)

To determine

Calculate the net realizable value of the accounts receivable at December 31, Year 2.

Explanation of Solution

Calculate the net realizable value of the accounts receivable at December 31, Year 1.

Particulars	Amount ($)
Accounts receivable balance at December 31, Year 2	15,350
Less: Allowance for Doubtful Accounts, December 31, Year 2	(768)
Net realizable value of the accounts receivable at December 31, Year 2	14,582

Table (6)

Therefore, the net realizable value of the accounts receivable at December 31, Year 2 is $14,582.