Problem 7-17A: Accounting for Uncollectible Accounts: Two Cycles Using the Percent of Revenue Allowance Method

The following transactions apply to Jova Company for Year 1, the first year of operation:

1. Issued $10,000 of common stock for cash.
2. Recognized $210,000 of service revenue earned on account.
3. Collected $162,000 from accounts receivable.
4. Paid $125,000 cash for operating expenses.
5. Adjusted the accounts to recognize uncollectible accounts expense. Jova uses the allowance method of accounting for uncollectible accounts and estimates that uncollectible accounts expense will be 1 percent of sales on account.

The following transactions apply to Jova for Year 2:

1. Recognized $320,000 of service revenue on account.
2. Collected $335,000 from accounts receivable.
3. Determined that $2,150 of the accounts receivable were uncollectible and wrote them off.
4. Collected $800 of an account that had previously been written off.
5. Paid $205,000 cash for operating expenses.
6. Adjusted the accounts to recognize uncollectible accounts expense for Year 2. Jova estimates uncollectible accounts expense will be 0.5 percent of sales on account.

Required

Complete the following requirements for Year 1 and Year 2. Complete all requirements for Year 1 prior to beginning the requirements for Year 2.

a. Identify the type of each transaction (asset source, asset use, asset exchange, or claims exchange).

b. Show the effect of each transaction on the elements of the financial statements, using a horizontal statements model like the one shown here. Use + for increase, − for decrease, and NA for not affected. Also, 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. (Hint: Closing entries do not affect the statements model.)

c. Record the transactions in general journal form and post them to T-accounts (begin Year 2 with the ending T-account balances from Year 1).

d. Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows.

e. Prepare closing entries and post these closing entries to the T-accounts. Prepare the post-closing trial balance.

Problem 7-18A: Determining Account Balances and Preparing Journal Entries: Percent of Revenue Allowance Method of Accounting for Uncollectible Accounts

During the first year of operation, Year 1, Direct Service Co. recognized $290,000 of service revenue on account. At the end of Year 1, the accounts receivable balance was $46,000. For this first year in business, the owner believes uncollectible accounts expense will be about 1 percent of sales on account.

Required

a. What amount of cash did Direct Service collect from accounts receivable during Year 1?

b. Assuming Direct Service uses the allowance method to account for uncollectible accounts, what amount should Direct Service record as uncollectible accounts expense for Year 1?

c. Prepare the general journal entries to:

1. Record service revenue on account.
2. Record collections from accounts receivable.
3. Record the entry to recognize uncollectible accounts expense.

d. What is the net realizable value of receivables at the end of Year 1?

e. Show the effects of the transactions in Requirement c on the financial statements by recording the appropriate amounts in a horizontal statements model like the one shown next. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). Use NA for not affected.