Exercise 7-5B: Analyzing Financial Statement Effects of Accounting for Uncollectible Accounts

Accounting for Receivables

Exercise 7-5B: Analyzing Financial Statement Effects of Accounting for Uncollectible Accounts Using the Percent of Revenue Allowance Method

Tull Bros. uses the allowance method to account for uncollectible accounts expense. Tull experienced the following four events in Year 1:

1. Recognized $68,000 of revenue on account.
2. Collected $62,000 cash from accounts receivable.
3. Determined that $500 of accounts receivable were not collectible and wrote them off.
4. Recognized uncollectible accounts expense for the year. Tull estimates that uncollectible accounts expense will be 2 percent of its sales.

Required:

• a. Show the effect of each of these events on the elements of the financial statements using a horizontal statements model like the following one. Use + for increase, − for decrease, and NA for not affected. In the Cash Flow column, indicate whether the item is an Operating Activity (OA), Investing Activity (IA), or Financing Activity (FA).
• b. Record the above transactions in general journal form.

Exercise 7-6B: Effect of Recovering a Receivable Previously Written Off

The accounts receivable balance for Edd’s Shoe Repair at December 31, Year 1, was $76,000. Also on that date, the balance in the Allowance for Doubtful Accounts was $3,200. During Year 2, $2,900 of accounts receivable were written off as uncollectible. In addition, Edd’s Shoe Repair unexpectedly collected $200 of receivables that had been written off in a previous accounting period. Sales on account during Year 2 were $210,000, and cash collections from receivables were $215,000. Uncollectible accounts expense was estimated to be 1 percent of the sales on account for the period.

Required:

• a. Record the transactions in general journal form and post them to T-accounts.
• b. Based on the preceding information, compute (after year-end adjustment):
  1. Balance of Allowance for Doubtful Accounts at December 31, Year 2.
  2. Balance of Accounts Receivable at December 31, Year 2.
  3. Net realizable value of Accounts Receivable at December 31, Year 2.
• c. What amount of uncollectible accounts expense will Edd’s Shoe Repair report for Year 2?
• d. Explain how the $200 recovery of receivables affected the accounting equation.