Exercise 7-4A: Effect of recognizing uncollectible accounts expense on financial statements

Exercise 7-4A: Effect of recognizing uncollectible accounts expense on financial statements: percent of revenue allowance method

Rosie Dry Cleaning was started on January 1, Year 1. It experienced the following events during its first two years of operation:

Events Affecting Year 1

1. Provided $45,000 of cleaning services on account.
2. Collected $39,000 cash from accounts receivable.
3. Adjusted the accounting records to reflect the estimate that uncollectible accounts expense would be 1 percent of the cleaning revenue on account.

Events Affecting Year 2

1. Wrote off a $300 account receivable that was determined to be uncollectible.
2. Provided $62,000 of cleaning services on account.
3. Collected $61,000 cash from accounts receivable.
4. Adjusted the accounting records to reflect the estimate that uncollectible accounts expense would be 1 percent of the cleaning revenue on account.

Required

a. Record the events for Year 1 in T-accounts.

b. Determine the following amounts:

1. Net income for Year 1.
2. Net cash flow from operating activities for Year 1.
3. Balance of accounts receivable at the end of Year 1.
4. Net realizable value of accounts receivable at the end of Year 1.

c. Repeat Requirements a and b for the Year 2 accounting period.

Exercise 7-5A: Analyzing financial statement effects of accounting for uncollectible accounts using the percent of revenue allowance method

Grover Inc. uses the allowance method to account for uncollectible accounts expense. Grover Inc. experienced the following four accounting events in Year 1:

1. Recognized $92,000 of revenue on account.
2. Collected $78,000 cash from accounts receivable.
3. Wrote off uncollectible accounts of $720.
4. Recognized uncollectible accounts expense. Grover estimated that uncollectible accounts expense will be 1 percent of sales on account.

Required

a. Show the effect of each event 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. 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.

b. Record the above transactions in general journal form.