Fundamental Financial Accounting Concepts, 9th Edition
Fundamental Financial Accounting Concepts, 9th Edition
9th Edition
ISBN: 9780078025907
Author: Thomas P Edmonds, Christopher Edmonds, Frances M McNair, Philip R Olds
Publisher: McGraw-Hill Education
Question
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Chapter 7, Problem 15BE

a)

To determine

Prepare general journal entries for each of the transactions.

a)

Expert Solution
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Explanation of Solution

Credit card sales: Credit card is an electronic card, which allows the credit card holders to buy something on credit conveniently, and without paying immediate cash.

Percentage of sales method: Credit sales are recorded by debiting (increasing) accounts receivable account. The bad debts is a loss incurred out of credit sales, hence uncollectible accounts can be estimated as a percentage of credit sales or total sales. It is a method of estimating the bad debts (expected loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of net credit sale (or total sales) for a specific period. Under percentage of sales method, estimated bad debts would be treated as a bad debt expense of the particular period.

Prepare journal entries for Company ST.

DateAccount title and ExplanationPost ref. Amount
DebitCredit
2016    
1.Cash $20,000 
Common stock  $20,000
(To record the issuance of common stock )   
     
2.Merchandise inventory $80,000 
 Accounts payable  $80,000
 (To record the purchase of inventory on account)   
     
3a.Accounts receivable $98,000 
 Sales revenue  $98,000
 (To record the sales made on account)   
     
3b.Cost of goods sold $61,000 
 Merchandise inventory  $61,000
 (To record the cost of merchandise sold on account)   
     
4.Allowance for doubtful acccounts $1,500 
 Accounts receivable  $1,500
 (To record the writing off of uncollectible)   
     
5.Notes receivable $10,000 
 Cash  $10,000
 (To record the issue of notes receivable)   
     
6.Salaries expense $24,500 
 Cash  $24,500
 (To record the cash paid for salaries expense)   
     
7.Cash $99,000 
 Accounts receivable  $99,000
 (To record the cash collected from accounts receivable)   
     
8.Accounts payable $78,000 
 Cash  $78,000
 (To record the cash paid to accounts payable)   
     
9.Dividends $5,000 
 Cash  $5,000
 (To record the payment of dividends)   
     
10a.Accounts receivable $4,800 
 Credit Card Expense ($5,000×4%) $200 
 Sales revenue  $5,000
 (To record the credit card sales)   
     
10b.Cost of goods sold $3,500 
 Merchandise inventory  $3,500
 (To record the cost of merchandise sold on credit card)   
     
11.Uncollectible accounts expense (1) $980 
 Allowance for doubtful accounts  $980
 (To record the uncollectible accounts expense)   
     
12.Interest receivable (2) $200 
 Interest revenue  $200
 (To record the accrual of interest income)   

Table (2)

Working Note:

Determine the amount of uncollectible account expense.

Uncollectible account expense}=(Sales on account)×(Estimated rate of percentage)=$98,000×1%=$980 (1)

Determine the amount of interest income for December 31, 2016.

The interest on note is earned for 4 months which is from September 01, 2016 to December 31, 2016.

Amount of interest=Principal×Interest Rate×Number of months earnedMonths in a year =$10,000×6100×412=$200 (2)

b)

To determine

Prepare T-accounts and record the beginning balances and the transactions of 2016 in T-accounts.

b)

Expert Solution
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Explanation of Solution

Prepare T-accounts and record the beginning balances and the transactions of 2016 in T-accounts.

Cash
Balance $16,0005.$10,000
1.$20,0006.$24,500
7.$99,0008.$78,000
 9.$5,000
Balance$17,500  
Accounts Receivable
Balance$18,0004.$1,500
3a.$98,0007.$99,000
Balance$15,500  
Allowance for Doubtful Accounts
  Balance$2,000
4.$1,50011.$980
  Balance$1,480
Merchandise Inventory
Balance$25,0003b.$61,000
2.$80,00010b.$3,500
Balance$40,500  
Accounts Receivable – Credit Card
10a.$4,800  
Balance$4,800  
Interest Receivable
12. (2)$200  
Balance$200  
Notes Receivable
5.$10,000  
Balance$10,000  
Accounts Payable
  Balance$9,200
8.$78,0002.$80,000
  Balance$11,200
Common Stock
  Balance$30,000
  1.$20,000
  Balance$50,000
Retained earnings
  Balance$17,800
    
Dividends
9.$5,000  
Balance$5,000  
Sales Revenue
  3a.$98,000
  10a.$5,000
  Balance$103,000
Cost of Goods Sold
3b.$61,000  
10b.$3,500  
Balance$64,500  
Salaries Expenses
6.$24,500  
Balance$24,500  
Uncollectible Accounts Expense
11.(1) $980  
Balance$980  
Credit Card Expense
10a. ($5,000×4%)$200  
Balance$200  
Interest revenue
  12.(2) $200
  Balance$200

c)

To determine

Prepare income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Company ST for 2016.

c)

Expert Solution
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Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Statement of changes in the stockholders’ equity: This statement reflects whether the components of stockholders’ equity have increased or decreased during the period.

Statement of cash flows: Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Prepare the income statement for Company ST for the year ended December 31, 2016.

Company ST
Statement of income
For the year ended December 31,  2016
ParticularsAmountAmount
Service revenue $103,000
Less: Cost of goods sold ($64,500)
Gross margin $38,500
Operating expenses  
Operating expense$24,500 
Uncollectible accounts expense$200 
Credit card expense$980 
Total operating expenses ($25,680)
Operating income $12,820
Interest revenue $200
Net income $13,020

Table (3)

Hence, the net income of Company ST for the year ended December 31, 2016 is $13,020.

Prepare the statement of changes in stockholders’ equity of Company ST for the year ended December 31, 2016.

Company ST
Statement of changes in stockholders' equity
For the year ended December 31, 2016
ParticularsAmountAmount
Beginning Common Stock$30,000 
Add: Stock Issued$20,000 
Ending Common Stock$50,000
Beginning retained earnings$17,800 
Add/Less: Net Income (Loss)$13,020 
 $30,820 
Less: Dividends paid($5,000) 
Ending Retained Earnings$25,820
Total stockholder's equity$75,820

Table (4)

Hence, the total stockholders’ equity of Company ST for the year ended December 31, 2016 is $75,820.

Prepare the balance sheet of Company ST as on December 31, 2016.

Company ST
Balance sheet
As on December 31, 2016
AssetsAmountAmount
Cash $17,500
Accounts Receivable$15,500 
Less: Allowance for doubtful accounts($1,480)$14,020
Merchandise Inventory $40,500
Accounts receivable – Credit cards $4,800
Interest receivable $200
Notes receivable $10,000
Total Assets $87,020
Liabilities and stockholders' equity  
Liabilities  
Accounts payable$11,200 
Total Liabilities $11,200
Stockholders’ Equity  
Common Stock$50,000 
Retained Earnings$25,820 
Total Stockholders’ Equity $75,820
Total liabilities and stockholders' equity $87,020

Table (5)

Hence, the total of assets and liabilities and stockholders’ equity of Company ST as on December 31, 2016 is $87,020.

Prepare the statement of cash flows of Company ST for the year ended December 31, 2016.

Company ST
Statement of cash flows
For the year ended December 31, 2016
ParticularsAmountAmount
Cash flow from operating activities:  
Cash Receipts from Customers$99,000 
Outflow for inventory ($78,000) 
Outflow for expenses ($24,500) 
Net Cash Flow from Operating Activities($3,500)
Cash Flows From Investing Activities:  
Issued note receivables($10,000) 
Net Cash Flow From Investing Activities($10,000)
Cash Flows From Financing Activities:  
Cash Receipts from Stock Issue$20,000
Cash paid for dividends($5,000) 
Net Cash Flow From Financing Activities$15,000
Net Change in Cash$1,500
Add: Beginning Cash Balance$16,000
Ending Cash Balance$17,500

Table (6)

Hence, the net change in cash of Company ST during 2016 is $1,500.

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Chapter 7 Solutions

Fundamental Financial Accounting Concepts, 9th Edition

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