Fundamental Financial Accounting Concepts
Fundamental Financial Accounting Concepts
10th Edition
ISBN: 9781259918186
Author: Thomas P Edmonds, Christopher Edmonds, Frances M McNair, Philip R Olds
Publisher: McGraw-Hill Education
Question
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Chapter 7, Problem 26AP

a.

To determine

Prepare the general journal entry and post the entries to T-accounts, an income statement, statement of changes in stockholders’ equity, a balance sheet, and a statement of cash flows for Year 2.

a.

Expert Solution
Check Mark

Explanation of Solution

Allowance method: It is a method for accounting bad debt expense, where amount of uncollectible accounts receivables are estimated and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for doubtful account.

Prepare the journal entries.

EventAccount Titles and explanation

Debit

($)

Credit ($)
1.Merchandise Inventory580,000 
 Accounts Payable 580,000
 (To receord the purchase of inventories on account)  
    
2a.Accounts Receivable890,000 
 Sales Revenue 890,000
 (To record the sales made on account)  
    
2b.Cost of Goods Sold420,000 
 Merchandise Inventory 420,000
 (To record the cost of goods sold)  
    
3a.Cash245,000 
 Sales Revenue 245,000
 (To record the sales made for cash)  
    
3b.Cost of Goods Sold160,000 
 Merchandise Inventory 160,000
 (To record the cost of goods sold)  
    
4a.Accounts Receivable182,400 
 Credit Card Expense ($190,000×4%)7,600 
 Sales Revenue 190,000
 (To record the credit card sales)  
    
4b.Cost of Goods Sold96,000 
 Merchandise Inventory 96,000
 (To record the cost of goods sold)  
   
5.Cash620,000 
 Accounts Receivable 620,000
 (To record the cash collected  from accounts receivable)  
   
6.Accounts Payable610,000 
 Cash 610,000
 (To record the cash payment made for accounts payable)  
   
7.Selling and Administrative Expenses145,000 
 Cash 145,000
 (To record the payment made for selling and administrative expenses)  
   
8.Cash182,400 
 Accounts Receivable 182,400
 (To record the collection of cash for the sales made on account in event 4)  
   
9.Notes receivable60,000 
 Cash 60,000
 (To record the notes receivable)  
   
10.Allowance for doubtful accounts7,500 
 Accounts receivable 7,500
 (To record the allowance for doubtful accounts)  
   
11.a.Uncollectible accounts expense (1)8,900 
 Allowance for doubtful accounts 8,900
 (To record the uncollectible accounts expense)  
   
11.bInterest receivable (2)2,800 
 Interest revenue 2,800
 (To record the revenue from interest)  

Table (1)

Working note:

Calculate the amount for uncollectible accounts expense.

Uncollectible accounts expense=Accounts receivable×Rate of interest=$890,000×1%=$8,900 (1)

Calculate the amount of interest receivable.

Total interest=Loan amount×Rate of interest=$60,000×8%=$4,800(A)

Calculate the amount of interest receivable.

Interest receivable=Total interest×Number of monthsMonths in a year=$4,800(A)×712(Maturity period)=$2,800 (2)

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a) The title of the account

b) The left or debit side

c) The right or credit side

Post the transactions to T-account.

Cash
Beginning balance$110,0006.$610,000
3a.$245,0007.$145,000
5.$620,0009.$60,000
8.$182,400
Ending balance$342,000
Accounts receivable
Beginning balance$125,0005.$620,000
2a.$890,008.$182,400
4a.$182,40010.$7,500
Ending balance$387,500
Allowance for doubtful accounts
Beginning balance$18,000
10.$7,50011a.$8,900
Ending balance$19,400
Merchandise inventory
Beginning balance$425,0002b.$420,000
10.$7,50011a.$8,900
4b.$96,000
Ending balance$329,000
Notes receivable
9.$60,000
Ending balance$60,000
Interest receivable
11b.$2,800
Ending balance$2,800
Accounts payable
6.$610,000Beginning balance$95,000
1.$580,000
Ending balance$65,000
Common stock
Balance$450,000
Retained earnings
Balance$450,000
Sales revenue
2a.$890,000
3a.$245,000
4a.$190,000
Ending balance$1,325,000
Cost of goods sold
2b.$420,000
3b.$160,000
4b.$96,000
Ending balance$676,000
Credit card expense
4a.$7,600
Ending balance$7,600
Selling and administrative expense
7.$145,000
Ending balance$145,000

Uncollectible accounts expense

11a.$8,900
Ending balance$8,900
Interest revenue
11b.$2,800
Ending balance$2,800

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.

Prepare the income statement.

Incorporation TE
Income statement
For the year ended 31st December, Year 2
ParticularsAmount($)Amount ($)
Revenue
Sales revenue1,325,000
Less: Cost of goods sold676,000
Gross profit649,000
Less:  Operating Expenses
Credit card expenses7,600
Selling and administrative expenses145,000
Uncollectible accounts expense8,900
Total operating income161,500
Operating income487,5000
Add: Non-operating items
Interest revenue2,800
Net income490,300

Table (2)

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

Prepare the statement of changes in stockholders’ equity.

Incorporation TE
Statement of changes in stockholders’ equity
For the year ended 31st December, Year 2
ParticularsAmount ($)Amount ($)
Beginning common stock450,000
Add: Common stocks issued0
Ending common stock450,000
Beginning retained earnings97,000
Add: Net income490,300
Less: Dividends0
Ending retained earnings587,300
Total stockholders’ equity1,037,300

Table (3)

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.

Prepare the balance sheet.

Incorporation TE
Balance sheet
As of 31st December, Year 2
ParticularsAmount ($)Amount ($)
Assets
Cash342,400 
Accounts receivable387,500
Less: Allowance for doubtful accounts19,400368,100
Merchandise inventory329,000
Interest receivable2,800
Notes receivable60,000
Total assets1,102,300
Liabilities
Accounts payable65,000
Total liabilities65,000
Stockholders’ equity
Common stock450,000
Retained earnings587,300
Total stockholders' equity1,307,300
Total liabilities and stockholders' equity1,102,300

Table (4)

Statement of cash flows: This statement reports all the cash transactions involves for inflow and outflow of cash, and the result of these transactions is reported as an ending balance of cash at the end of reported period.

Prepare the statement of cash flows.

Incorporation TE
Statement of cash flow
For the year ended 31st December, Year 2
ParticularsAmount ($)Amount ($)
Cash flow from operating activities:
Inflow from customers (3)1,047,400
Outflow for inventory(610,000)
Outflow for expenses(145,000)
Net cash flow from operating activities292,400
Cash flow from investing activities
Outflow for notes receivable(60,000)
Net cash flow from investing activities(60,000)
Cash flow from financing activities0
Net change in cash232,400
Add: Beginning cash balance110,000
Ending cash balance342,400

Table (5)

Working note:

Calculate the amount of inflow from customers.

Total inflow from customers=(Cash sales+Collection from accounts receivable+Credit card sales collection)=$245,000+$620,000+$182,400=$1,047,400 (3)

b.

To determine

Compute the net realizable value of the accounts receivable at December 31, Year 2.

b.

Expert Solution
Check Mark

Explanation of Solution

Net realizable value: Net realizable value is the net amount of receivables which a business expects to collect from its debtors. Accounts receivable less allowance for doubtful accounts is represented as cash realizable value.

Calculate the net realizable value:

Net realizable value=Accounts receivableAllowance for doubtful debts=$368,100$19,400=$368,100

Hence, the net realizable value is $368,100

c.

To determine

Identify the amount of uncollectible accounts expense that would be reported on the income statement.

c.

Expert Solution
Check Mark

Explanation of Solution

Uncollectible accounts expense:

Uncollectible accounts expense is an expense account. Amount of loss incurred from extending credit to the customers are recorded as uncollectible accounts expense. In other words, estimated uncollectible accounts receivable are known as uncollectible accounts expense.

The amount of uncollectible expense using direct write-off method is $7,500 is the amount that would be reported on the income statement.

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Chapter 7 Solutions

Fundamental Financial Accounting Concepts

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