Chapter 7, Problem 7BE

a.

To determine

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

Answer to Problem 7BE

Prepare the journal entries for Year 1 events

Date	Accounts title and explanation	Post ref	Debit ($)	Credit ($)
1.	Cash		5,000
	Common Stock			5,000
	(To record the issue of common stock)
2.	Accounts Receivable		80,000
	Service Revenue			80,000
	(To record the service revenue)
3.	Cash		22,000
	Service Revenue			22,000
	(To record cash collection)
4.	Cash		65,000
	Accounts Receivable			65,000
	(To record the cash collection from custmors)
5.	Salaries Expense		24,000
	Cash			24,000
	(To record the salaries expenses)
6.	Uncollectible Accounts Expense (1)		750
	Allowance for Doubtful Accounts			750
	(To record the bad debt expense)
7.	Service Revenue		102,000
	Retained Earnings			102,000
	(To close the revenue account)
8.	Retained Earnings		24,750
	Uncollectible Accounts Expense			750
	Salaries Expense			24,000
	(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	5,000
3. Service revenue	22,000
4. Accounts receivables	35,000	5. Salaries expense	24,000
Ending Balance	68,000

	Accounts receivable
Beginning Balance		0	4. Collections	65,000
2. Service on account		80,000
Ending Balance		15,000

Allowance for doubtful accounts
		6. Uncollectible accounts (1)	750
		Ending Balance	750

Common stock
		1. Cash	5,000
		Ending Balance	5,000

Retained earnings
Beginning Balance	0
8. Closing entry	24,750	7. Closing entry	102,000
		Ending Balance	75,550

Service revenue
7. Closing entry	102,000	2. Service on account 3. Cash service	80,000 22,000
		Ending Balance	0

Salaries expense
5. Cash	24,000
		8. Closing entry	24,000
		Ending Balance	0

uncollectible accounts expense
6. allowance for doubtful accounts	750	8. Closing entry	750
		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.

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

Uncollectible accounts are estimated 5% of the ending accounts receivables balance. Ending accounts receivable are $15,000

$\begin{array}{c}\text{Uncollectible account expense}\text{= Revenue earned on Account }\times \text{ 5\%}\\ \text{=}\text{\$15,000}\times 5\text{\%}\\ \text{=}\text{\$750}\end{array}$ (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 J
Income statement
For the year ended December 31, Year 1
Particulars	Amount ($)	Amount ($)
Service Revenue		$102,000
Operating Expenses:
Salaries Expense	$24,000
Uncollectible Accounts Expense	750
Total Operating Expenses		(24,750)
Net Income		$77,250

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 J
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	5,000
Ending Common Stock		$5,000
Beginning Retained Earnings	0
Add: Net Income	77,250
Ending Retained Earnings		$77,250
Total Stockholders’ Equity		$82,250

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 J
Balance sheet
As on December 31, Year 1
Particulars	Amount ($)	Amount ($)
Assets
Cash		$68,000
Accounts Receivable	$15,000
Less: Allowance for Doubtful Accounts	(750)	14,250
Total Assets		$82,250
Liabilities		$0
Stockholders’ Equity
Common Stock	$5,000
Retained Earnings	77,250
Total Stockholders’ Equity		82,250
Total Liabilities and Stockholders’ Equity		$82,250

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 J
Statement of Cash Flows
For the year ended December 31, Year 1
Particulars	Amount ($)	Amount ($)
Cash Flows From Operating Activities:
Cash collcetion from Customers	$87,000
Cash paid for Expenses	(24,000)
Net Cash Flow from Operating Activities		$63,000
Cash Flows From Investing Activities		0
Cash Flows From Financing Activities
Issue of Common Stock		5,000
Net Change in Cash		68,000
Add: Beginning Cash Balance		0
Ending Cash Balance		$68,000

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	15,000
Less: Allowance for Doubtful Accounts, December 31, Year 1	(750)
Net realizable value of the accounts receivable at December 31, Year 1	14,250

Table (6)

Therefore, the net realizable value of the accounts receivable at December 31, Year 1 is $14,250.

d (a)

To determine

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

Answer to Problem 7BE

Prepare the journal entries for Year 2 events

Date	Accounts title and explanation	Post ref	Debit ($)	Credit ($)
1.	Allowance for Doubtful Accounts		620
	Accounts Receivable			620
	(To record the write off an uncollectible accounts)
2.	Accounts Receivable		95,000
	Service Revenue			95,000
	(To record the service revenue)
3.	Cash		15,000
	Service Revenue			15,000
	(To record cash collection)
4.	Cash		90,000
	Accounts Receivable			90,000
	(To record the cash collection from custmors)
5.	Salaries Expense		35,000
	Cash			35,000
	(To record the salaries expenses)
6.	Uncollectible Accounts Expense (2)		839
	Allowance for Doubtful Accounts			839
	(To record the bad debt expense)

Table (7)

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

Cash
Beginning Balance	68,000
3. Service revenue	15,000
4. Accounts receivables	90,000	5. Salaries expense	35,000
Ending Balance	138,000

	Accounts receivable
Beginning Balance		15,000	1. Write-off	650
2. Service on account		95,000	4. Collections	90,000
Ending Balance		19,380

Allowance for doubtful accounts
		Beginning Balance	750
1. Write-off	620	6. Uncollectible account expense (1)	839
		Ending Balance	969

Common stock
		Beginning Balance	5,000
		Ending Balance	5,000

Retained earnings
		Beginning Balance	77,250
		Ending Balance	77,250

Service revenue
		2. Service on account 3. Cash service	95,000 15,000
		Ending Balance	110,000

Salaries expense
5. Cash	35,000
Ending Balance	35,000

uncollectible accounts expense
6. Allowance for doubtful accounts	839
Ending Balance	839

Explanation of Solution

Calculate the bad debt (uncollectible accounts) expense for Year 2.

Uncollectible accounts are estimated 5% of the ending accounts receivables balance. Ending accounts receivable are $19,380.

Particulars	Amount ($)
Ending accounts receivables for Year 2 (1)	$19,380
Estimated uncollectible account expense rate	5%
Estimated ending balance of uncollectible account balance $\left(\$19,380\text{×}5\%\right)$	$969
Less: Write-off of uncollectible account balance in Year 2	($620)
Add: Beginning balance of uncollectible account balance	$750
Amount of uncollectible accounts expense for Year 2	$839

…… (2)

Table (8)

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 2.

Incorporation J
Income statement
For the year ended December 31, Year 2
Particulars	Amount ($)	Amount ($)
Service Revenue		$110,000
Operating Expenses:
Salaries Expense	$35,000
Uncollectible Accounts Expense	839
Total Operating Expenses		(35,839)
Net Income		$74,161

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 2.

Incorporation J
Statement of changes in the Stockholders Equity
For the year ended December 31, Year 2
Particulars	Amount ($)	Amount ($)
Beginning Common Stock	5,000
Add: Common Stock Issued	0
Ending Common Stock		$5,000
Beginning Retained Earnings	77,250
Add: Net Income	74,161
Ending Retained Earnings		$151,411
Total Stockholders’ Equity		$156,411

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 J
Balance sheet
As on December 31, Year 2
Particulars	Amount ($)	Amount ($)
Assets
Cash		$138,000
Accounts Receivable	$19,380
Less: Allowance for Doubtful Accounts	(969)	18,411
Total Assets		$156,411
Liabilities		$0
Stockholders’ Equity
Common Stock	$5,000
Retained Earnings	151,411
Total Stockholders’ Equity		151,411
Total Liabilities and Stockholders’ Equity		$156,411

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 J
Statement of Cash Flows
For the year ended December 31, Year 2
Particulars	Amount ($)	Amount ($)
Cash Flows From Operating Activities:
Cash collcetion from Customers	$105,000
Cash paid for Expenses	(35,000)
Net Cash Flow from Operating Activities		$70,000
Cash Flows From Investing Activities		0
Cash Flows From Financing Activities
Issue of Common Stock		0
Net Change in Cash		70,000
Add: Beginning Cash Balance		68,000
Ending Cash Balance		$138,000

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	19,380
Less: Allowance for Doubtful Accounts, December 31, Year 2	(969)
Net realizable value of the accounts receivable at December 31, Year 2	18,411

Table (6)

Therefore, the net realizable value of the accounts receivable at December 31, Year 2 is $18,411.