Question

Exercise 7-7A Effect of recognizing uncollectible accounts on the financial statements: percent of receivables allowance method LO 7-2

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

Year 1:

1. Issued $29,000 of common stock for cash.
2. Provided $98,900 of services on account.
3. Provided $55,000 of services and received cash.
4. Collected $88,000 cash from accounts receivable.
5. Paid $57,000 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.
7. Closed the revenue account.
8. Closed the expense account.

Year 2:

1. Wrote off an uncollectible account for $840.
2. Provided $107,000 of services on account.
3. Provided $51,000 of services and collected cash.
4. Collected $100,000 cash from accounts receivable.
5. Paid $84,000 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.

b. Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Year 1. (Statement of Cash Flows and Balance Sheet only: Items to be deducted must be indicated with a minus sign.)
  

	LEACH INC. Income Statement For the Year Ended December 31, Year 1 Operating expenses Total operating expenses 0 $0

	LEACH INC. Statement of Changes in Stockholders’ Equity For the Year Ended December 31, Year 1 $0 0 Total stockholders’ equity $0

	LEACH INC. Balance Sheet As of December 31, Year 1 Assets 0 Total assets $0 Liabilities Stockholders’ equity Total stockholders' equity 0 Total liabilities and stockholders' equity $0

  

	LEACH INC. Statement of Cash Flows For the Year Ended December 31, Year 1 Cash flow from operating activities Net cash flow from operating activities $0 Cash flows from investing activities Cash flows from financing activities Net change in cash 0 Ending cash balance $0

Answer 1

Solution 1b:
Leach Inc.
Income statement
For the year ended December 31, Year 1
Sales Revenue		153900
Operating expenses:
Salaries expense	57000
Uncollectibe accounts expense [(98900-88000)*5%]	545
Total Operating expenses		57545
Net Income		96355

Leach Inc.
Statement of chanages in Stockholders' Equity
For the year ended December 31, Year 1
Beginning Common stock	0
Add: Common stock Issued	29000
Ending Common stock		29000
Beginning Retained earnings	0
Add: Net Income	96355
Ending Retained Earnings		96355
Total Stockholders' Equity		125355

Leach Inc.
Balance Sheet
As of December 31, Year 1
Assets:
Cash (29000+55000+88000-57000)	115000
Accounts Recievable	10900
Allowance for uncollectible account	-545
Total Assets		125355
Liabilities		0
Stockholders' Equity:
Common Stock	29000
Retained earnings	96355
Total Stockholders' Equity		125355
Total Liabilities and Stockholders' Equity		125355

Statement of Cash flows
For the year ended December 31, Year 1
Cash Flows from Operating Activities
Cash collection from customers (55000+88000)	143000
Cash payment for salaries	-57000
Net cash flows from operating activities		86000
Cash Flows from Investing Activities		0
Cash Flows from Financing Activities:
Proceeds from issue of common stock		29000
Net change in cash		115000
Beginning cash balance		0
Ending Cash balance		115000