Question

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

Provided $25,990 of cleaning services on account.

Collected $20,792 cash from accounts receivable.

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

Wrote off a $195 account receivable that was determined to be uncollectible.

Provided $30,330 of cleaning services on account.

Collected $26,842 cash from accounts receivable.

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 and Year 2 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 b for the Year 2 accounting period.

Answer 1

Note: Kindly round off answers as required since no instructions provided with the question regarding rounding off.

a.

Cash					Accounts Receivable
Collections	20792				Services on account	25990	20792	Collections
End. Bal.	20792				End. Bal.	5198
Allowance for Uncollectible Accounts					Service Revenue
		259.90	Expense				25990	Services on account
End. Bal.		259.90			End. Bal.	25990
Uncollectible Accounts Expense
Allowance	259.90
End. Bal.	259.90

b.(1) Net income for Year 1 = $25990 - $259.90 = $25730.10

(2) Net cash flow from operating activities for Year 1: $20792

(3) Balance of accounts receivable at the end of Year 1 = $5198

(4) Net realizable value of accounts receivable at the end of Year 1 = $5198 - $259.90 = $4938.10

c.(1) Net income for Year 2 = $30330 - (1% x $30330) = $30330 - $303.30 = $30026.70

(2) Net cash flow from operating activities for Year 1: $26842

(3) Balance of accounts receivable at the end of Year 2 = $5198 - $195 + $30330 - $26842 = $8491

(4) Net realizable value of accounts receivable at the end of Year 2 = $8491 - ($259.90 - $195 + $303.30) = $8491 - $368.20 = $8122.80