Exercise 7-6A: Effect of recovering a receivable previously written off

The accounts receivable balance for Renue Spa at December 31, Year 1, was $61,000. Also on that date, the balance in the Allowance for Doubtful Accounts was $3,750. During Year 2, $2,100 of accounts receivable were written off as uncollectible.

In addition, Renue unexpectedly collected $500 of receivables that had been written off in a previous accounting period. Services provided on account during Year 2 were $215,000, and cash collections from receivables were $218,000. Uncollectible accounts expense was estimated to be 2 percent of the sales on account for the period.

Required

a. Record the transactions in general journal form and post to T-accounts.

b. Based on the preceding information, compute (after year-end adjustment):

1. Balance of Allowance for Doubtful Accounts at December 31, Year 2.
2. Balance of Accounts Receivable at December 31, Year 2.
3. Net realizable value of Accounts Receivable at December 31, Year 2.

c. What amount of uncollectible accounts expense will Renue report for Year 2?

d. Explain how the $500 recovery of receivables affects the income statement.

Exercise 7-7A: Effect of recognizing uncollectible accounts on the financial statements: percent of receivables allowance method

Leach Inc. experienced the following events for the first two years of its operations:

Year 1:

1. Issued $10,000 of common stock for cash.
2. Provided $78,000 of services on account.
3. Provided $36,000 of services and received cash.
4. Collected $69,000 cash from accounts receivable.
5. Paid $38,000 of salaries expense for the year.
6. Adjusted the accounting records to reflect uncollectible accounts expense for the year. Leach estimates that 5 percent of the ending accounts receivable balance will be uncollectible.

Year 2:

1. Wrote off an uncollectible account for $650.
2. Provided $88,000 of services on account.
3. Provided $32,000 of services and collected cash.
4. Collected $81,000 cash from accounts receivable.
5. Paid $65,000 of salaries expense for the year.
6. Adjusted the accounts to reflect uncollectible accounts expense for the year. Leach estimates that 5 percent of the ending accounts receivable balance will be uncollectible.

Required

a. Record the Year 1 events in general journal form and post them to T-accounts.

b. Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Year 1.

c. What is the net realizable value of the accounts receivable at December 31, Year 1?

d. Repeat Requirements a, b, and c for Year 2.