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