Demonstration Problem 7-1
The Solo Company was started on January 1, 20X1. The following events occurred during the 20X1 and 20X2 accounting periods.
20X1
1. Provided $4,000 of services on account.
2. Collected $3,000 cash from accounts receivable.
3. Estimated uncollectible accounts to be 5 percent of the ending receivables balance.
20X2
1. Wrote off $40 of accounts receivable that were determined to be uncollectible.
2. Provided 6,000 of services on account.
3. Collected $5,400 cash from accounts receivable.
4. Recovered a $5 bad debt that had been previously written off.
5. Collected $5 cash from the receivable reestablished in Event No. 4.
6. Estimated uncollectible accounts to be 5 percent of the ending receivables balance.
Required:
1. Record the events in T-accounts, close the revenue and expense accounts to retained earnings, and compare the balances shown in the T-accounts with the ending balances shown in the statements model.
2. Explain how each event affects the financial statements. Record the transaction amounts in a statements model under the titles of the elements that are affected by the event. Place a zero under each heading that is not affected by the event.
Demonstration Problem 7-1 ─ Solution for 20X1
Ledger T-Accounts |
|||||||||
Cash |
Liabilities |
Retained Earnings |
|||||||
(2) 3,000 |
3,950 cl. |
||||||||
Bal. 3,000 |
3,950 Bal. |
||||||||
Accounts Receivable |
. |
Revenue |
|||||||
(1) 4,000 |
3,000 (2) |
cl. 4,000 |
4,000 (1) |
||||||
Bal. 1,000 |
|||||||||
Allow. for Doubt. Accts. |
Bad Debts Expense |
||||||||
50 (3) |
(3) 50 |
50 cl. |
|||||||
50 Bal. |
|||||||||
Statements Model
Event |
Assets |
= |
Liab. |
+ |
Equity |
Rev. |
– |
Exp. |
= |
Net Inc. |
Cash Flow |
||||||||
No. |
Cash |
+ |
Acct. Rec. |
- |
Allow |
= |
Ret. Ear. |
||||||||||||
Beg. Bal. |
-0- |
+ |
-0- |
- |
-0- |
= |
-0- |
+ |
-0- |
-0- |
– |
-0- |
= |
-0- |
-0- |
||||
1. |
-0- |
+ |
4,000 |
- |
-0- |
= |
-0- |
+ |
4,000 |
4,000 |
– |
-0- |
= |
4,000 |
-0- |
||||
2. |
3,000 |
+ |
(3,000) |
- |
-0- |
= |
-0- |
+ |
-0- |
-0- |
– |
-0- |
= |
-0- |
+3,000 OA |
||||
3. |
-0- |
+ |
-0- |
- |
50 |
= |
-0- |
+ |
(50) |
-0- |
– |
50 |
= |
(50) |
-0- |
||||
Totals |
3,000 |
+ |
1,000 |
- |
50 |
= |
-0- |
+ |
3,950 |
4,000 |
– |
50 |
= |
3,950 |
+3,000 NC |
||||
Demonstration Problem 7-1 ─ Solution for 20X2
Ledger T-Accounts |
|||||||||
Cash |
Liabilities |
Retained Earnings |
|||||||
Bal. 3,000 |
3,950 Bal. |
||||||||
(3) 5,400 |
5,937 cl. |
||||||||
(5) 5 |
9,887 |
||||||||
Bal. 8,405 |
|||||||||
Accounts Receivable |
. |
Revenue |
|||||||
Bal. 1,000 |
40 (1) |
cl. 6,000 |
6,000 (2) |
||||||
(2) 6,000 |
5,400 (3) |
||||||||
(4) 5 |
5 (5) |
||||||||
Bal. 1,560 |
|||||||||
Allow. for Doubt. Accts. |
Bad Debts Expense |
||||||||
(1) 40 |
50 Bal. |
(6) 63 |
63 cl. |
||||||
5 (4) |
|||||||||
63 (6) |
|||||||||
78 Bal. |
|||||||||
Statements Model
Event |
Assets |
= |
Liab. |
+ |
Equity |
Rev. |
– |
Exp. |
= |
Net Inc. |
Cash Flow |
||||||||
No. |
Cash |
+ |
Acct. Rec. |
- |
Allow |
= |
Ret. Ear. |
||||||||||||
Beg. Bal. |
3,000 |
+ |
1,000 |
- |
50 |
= |
-0- |
+ |
3,950 |
-0- |
– |
-0- |
= |
-0- |
-3000- |
||||
1. |
-0- |
+ |
(40) |
- |
(40) |
= |
-0- |
+ |
-0- |
-0- |
– |
-0- |
= |
-0- |
-0- |
||||
2. |
-0- |
+ |
6,000 |
- |
-0- |
= |
-0- |
+ |
6,000 |
6,000 |
– |
-0- |
= |
6,000 |
-0- |
||||
3. |
5,400 |
+ |
(5,400) |
- |
-0- |
= |
-0- |
+ |
-0- |
-0- |
– |
-0- |
= |
-0- |
+5,400 OA |
||||
4. |
-0- |
+ |
5 |
- |
5 |
= |
-0- |
+ |
-0- |
-0- |
– |
-0- |
= |
-0- |
-0- |
||||
5. |
5 |
+ |
(5) |
- |
-0- |
= |
-0- |
+ |
-0- |
-0- |
– |
-0- |
= |
-0- |
5 OA |
||||
6. |
-0- |
+ |
-0- |
- |
63 |
= |
-0- |
+ |
(63) |
-0- |
– |
63 |
= |
(63) |
-0- |
||||
Totals |
8,405 |
+ |
1,560 |
- |
78 |
= |
-0- |
+ |
9,887 |
6,000 |
– |
63 |
= |
5,937 |
+8,405 NC |
||||
Demonstration Problem 7-3
The following accounting events apply to the first year of operation for Computer Consultants.
1. The company was started on April 1, 20X1 when it issued a $5,000 face value discount note to a state bank. The note carried a 12 percent discount rate and a one-year term.
2. Paid $4,200 cash for operating expenses.
3. Recognized $7,300 of cash revenue.
4. Recognized accrued interest expense.
Accounting events affecting 20X2 were as follows:
1. Recognized three months of accrued interest expense on the discount note on April 1, 20X2.
2. Paid bank the face value of the note.
3. Recognized $9,500 of cash revenue.
4. Paid $6,400 cash for operating expenses.
Required:
a. Record the events for 20X1 and 20X2 in T-accounts.
b. Record the events for 20X1 and 20X2 in a statements model.
Demonstration Problem 7-3 ─ Solution ─ 20X1
20X1 Ledger T-Accounts |
||||||||||
Cash |
Notes Payable |
Retained Earnings |
||||||||
(1) 4,400 |
4,200 (2) |
5,000 (1) |
2,650 cl. |
|||||||
(3) 7,300 |
5,000 Bal. |
2,650 Bal. |
||||||||
Bal. 7,500 |
||||||||||
Discount on Note Pay. |
Revenue |
|||||||||
(1) 600 |
450 (4) |
cl. 7,300 |
7,300 (3) |
|||||||
Bal. 150 |
||||||||||
Operating Expense |
||||||||||
(2) 4,200 |
4,200 cl. |
|||||||||
Interest Expense |
||||||||||
(4) 450 |
450 cl. |
|||||||||
Statements Model
Event |
Assets |
= |
Liabilities |
+ |
Equity |
Rev. |
– |
Exp. |
= |
Net Inc. |
Cash Flow |
||||||
No. |
Cash |
= |
Note Pay. |
- |
Disc. |
+ |
Ret. Ear. |
||||||||||
Beg. Bal. |
-0- |
= |
-0- |
- |
-0- |
+ |
-0- |
-0- |
– |
-0- |
= |
-0- |
-0- |
||||
1. |
4,400 |
= |
5,000 |
- |
600 |
+ |
-0- |
-0- |
– |
-0- |
= |
-0- |
4,400 FA |
||||
2. |
(4,200) |
= |
-0- |
- |
-0- |
+ |
(4,200) |
-0- |
– |
4,200 |
= |
(4,200) |
(4,200) OA |
||||
3. |
7,300 |
-0- |
- |
-0- |
+ |
7,300 |
7,300 |
– |
-0- |
= |
7,300 |
7,300 OA |
|||||
4. |
-0- |
= |
-0- |
- |
(450) |
+ |
(450) |
-0- |
– |
450 |
= |
(450) |
-0- |
||||
Totals |
7,500 |
= |
5,000 |
- |
150 |
+ |
2,650 |
7,300 |
– |
4,650 |
= |
2,650 |
+7,500 NC |
||||
Demonstration Problem 7-3 ─ Solution ─ 20X2
20X2 Ledger T-Accounts |
||||||||||
Cash |
Notes Payable |
Retained Earnings |
||||||||
Bal. 7,500 |
5,000 (2) |
(2) 5,000 |
5,000 Bal. |
2,650 Bal. |
||||||
(3) 9,500 |
6,400 (4) |
2,950 cl. |
||||||||
Bal. 5,600 |
5,600 Bal. |
|||||||||
Discount on Note Pay. |
Revenue |
|||||||||
Bal. 150 |
150 (1) |
cl. 9,500 |
9,500 (3) |
|||||||
Operating Expense |
||||||||||
(4) 6,400 |
6,400 cl. |
|||||||||
Interest Expense |
||||||||||
(1) 150 |
150 cl. |
|||||||||
Statements Model
Event |
Assets |
= |
Liabilities |
+ |
Equity |
Rev. |
– |
Exp. |
= |
Net Inc. |
Cash Flow |
||||||
No. |
Cash |
= |
Note Pay. |
- |
Disc |
+ |
Ret. Ear. |
||||||||||
Beg. Bal. |
7,500 |
= |
5,000 |
- |
150 |
+ |
2,650 |
-0- |
– |
-0- |
= |
-0- |
7500 |
||||
1. |
-0- |
= |
-0- |
- |
(150) |
+ |
(150) |
-0- |
– |
150 |
= |
(150) |
-0- |
||||
2. |
(5,000) |
= |
(5,000) |
- |
-0- |
+ |
-0- |
-0- |
– |
-0- |
= |
-0- |
(4,400) FA (600)OA |
||||
3. |
9,500 |
= |
-0- |
- |
-0- |
+ |
9,500 |
9,500 |
– |
-0- |
= |
9,500 |
9,500 OA |
||||
4. |
(6,400) |
= |
-0- |
- |
-0- |
+ |
(6,400) |
-0- |
– |
6,400 |
= |
(6,400) |
(6,400) OA |
||||
Totals |
5,600 |
= |
-0- |
- |
-0- |
+ |
5,600 |
9,500 |
– |
6,550 |
= |
2,950 |
5600 NC |
||||