Problem 7-17B: Accounting for Uncollectible Accounts—Two Cycles Using the Percent of Revenue Allowance Method
The following transactions apply to Sports Consulting for Year 1, the first year of operation:
- Issued $5,000 of common stock for cash.
- Recognized $70,000 of service revenue earned on account.
- Collected $62,000 from accounts receivable.
- Adjusted accounts to recognize uncollectible accounts expense. Sports uses the allowance method of accounting for uncollectible accounts and estimates that uncollectible accounts expense will be 2 percent of sales on account.
The following transactions apply to Sports Consulting for Year 2:
- Recognized $84,000 of service revenue on account.
- Collected $70,000 from accounts receivable.
- Determined that $1,100 of the accounts receivable were uncollectible and wrote them off.
- Collected $200 of an account that had been previously written off.
- Paid $51,200 cash for operating expenses.
- Adjusted accounts to recognize uncollectible accounts expense for Year 2. Sports estimates that uncollectible accounts expense will be 1 percent of sales on account.
Required:
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Complete all the following requirements for Year 1 and Year 2. Complete all requirements for Year 1 prior to beginning the requirements for Year 2.
a. Identify the type of each transaction (asset source, asset use, asset exchange, or claims exchange).
b. Show the effect of each transaction on the elements of the financial statements, using a horizontal statements model like the one shown next. Use "+" for increase, "−" for decrease, and "NA" for not affected. Also, 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. (Hint: Closing entries do not affect the statements model.)
c. Record the transactions in general journal form and post them to T-accounts (begin Year 2 with the ending T-account balances from Year 1).
d. Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows.
e. Prepare closing entries and post these closing entries to the T-accounts. Prepare a post-closing trial balance.
Problem 7-18B: Determination of Account Balances and Preparation of Journal Entries—Percent of Receivables Allowance Method of Accounting for Uncollectible Accounts
During the first year of operation, Year 1, Home Renovation recognized $261,000 of service revenue on account. At the end of Year 1, the accounts receivable balance was $46,300. Even though this is his first year in business, the owner believes he will collect all but about 4 percent of the ending balance.
Required:
a. What amount of cash was collected by Home Renovation during Year 1?
b. Assuming the use of an allowance system to account for uncollectible accounts, what amount should Home Renovation record as uncollectible accounts expense in Year 1?
c. Prepare the journal entries to:
(1) Record service revenue on account.
(2) Record collection of accounts receivable.
(3) Record the entry to recognize uncollectible accounts expense.
d. What is the net realizable value of receivables at the end of Year 1?
e. Show the effect of the transactions listed in Requirement c on the financial statements by recording the appropriate amounts in a horizontal statements model like the one shown next. When you record amounts in the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). The letters "NA" indicate that an element is not affected by the event.
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