Analysis of financial statement effects of accounting for uncollectible accounts under the allowance method

Accounting for Receivables

Exercise 7-1A Analysis of financial statement effects of accounting for uncollectible accounts under the allowance method

Businesses using the allowance method for the recognition of uncollectible accounts expense commonly experience four accounting events:

1. Recognition of uncollectible accounts expense through a year-end adjusting entry.
2. Write-off of uncollectible accounts.
3. Recognition of revenue on account.
4. Collection of cash from accounts receivable.

Required

Show the effect of each event on the elements of the financial statements, using a horizontal statements model like the one shown next. Use the following coding scheme to record your answers: increase is +, decrease is −, not affected is NA. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). The first transaction is entered as an example.

Exercise 7-2A Accounting for uncollectible accounts: allowance method

Holmes Cleaning Service began operation on January 1, Year 1. The company experienced the following events for its first year of operations:

Events Affecting Year 1:

1. Provided $84,000 of cleaning services on account.
2. Collected $76,000 cash from accounts receivable.
3. Paid salaries of $28,500 for the year.
4. Adjusted the accounts to reflect management’s expectations that uncollectible accounts expense would be $1,650. The expense was determined using the percent of revenue method.

Required

a. Prepare general journal entries for Events 1 through 4.

b. Post the general journal entries to T-accounts.

c. Prepare an income statement, balance sheet, and statement of cash flows for Year 1.

Exercise 7-3A Analyzing account balances for a company using the allowance method of accounting for uncollectible accounts

The following account balances come from the records of Ourso Company:

During the accounting period, Ourso recorded $14,000 of sales revenue on account. The company also wrote off a $150 account receivable.

Required

a. Determine the amount of cash collected from receivables.

b. Determine the amount of uncollectible accounts expense recognized during the period.