Problem 7-25A: Effect of transactions on the elements of financial statements

Identify each of the following independent transactions as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE). Also explain how each event affects assets, liabilities, stockholders’ equity, net income, and cash flow by placing a + for increase, − for decrease, or NA for not affected under each of the categories. The first event is recorded as an example.

a. Provided services on account.
b. Wrote off an uncollectible account (use the direct write-off method).
c. Loaned cash to H. Phillips for one year at 6 percent interest.
d. Collected cash from customers paying their accounts.
e. Paid cash for land.
f. Sold merchandise at a price above cost. Accepted payment by credit card. The credit card company charges a service fee. The receipts have not yet been forwarded to the credit card company.
g. Provided services for cash.
h. Paid cash for operating expenses.
i. Paid cash for salaries expense.
j. Recovered an uncollectible account that had been previously written off (assume the direct write-off method is used to account for uncollectible accounts).
k. Paid cash to creditors on accounts payable.
l. Recorded three months of accrued interest on the note receivable (see item c).
m. Submitted receipts to the credit card company (see item f) and collected cash.
n. Sold land at its cost.

Problem 7-26A Comprehensive accounting cycle problem (uses percent of revenue allowance method)

The following trial balance was prepared for Tile, Etc., Inc. on December 31, Year 1, after the closing entries were posted:

Tile, Etc. had the following transactions in Year 2:

1. Purchased merchandise on account for $580,000.
2. Sold merchandise that cost $420,000 for $890,000 on account.
3. Sold for $245,000 cash merchandise that had cost $160,000.
4. Sold merchandise for $190,000 to credit card customers. The merchandise had cost $96,000. The credit card company charges a 4 percent fee.
5. Collected $620,000 cash from accounts receivable.
6. Paid $610,000 cash on accounts payable.
7. Paid $145,000 cash for selling and administrative expenses.
8. Collected cash for the full amount due from the credit card company (see item 4).
9. Loaned $60,000 to J. Parks. The note had an 8 percent interest rate and a one-year term to maturity.
10. Wrote off $7,500 of accounts as uncollectible.
11. Made the following adjusting entries:
    (a) Recorded uncollectible accounts expense estimated at 1 percent of sales on account.
    (b) Recorded seven months of accrued interest on the note at December 31, Year 2 (see item 9).

Required:

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

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

c. If Tile, Etc. used the direct write-off method, what amount of uncollectible accounts expense would it report on the income statement?