Question

Chapter 7 Accounting for Bad Debts

Problem 7-1 - Accounting for Bad Debts

The Solo Company was started on January 1, 2010. The following events occurred
during 2010 and 2011.

2010

1.   Provided $4,000 of services on account.

2.   Collected $3,000 cash from accounts receivable.

3.   Estimated uncollectible accounts expense to be 1.5% of 2010 credit sales.

2011

1.   Wrote off $40 of accounts receivable that were deemed uncollectible.

2.   Provided $6,500 of services on account.

3.   Collected $5,400 cash from accounts receivable.

4. Received $5 from a bad debt that had been previously written off. Reinstated the account.

5.   Recorded the $5 cash received from the receivable reinstated in Event No. 4.

6.   Estimated uncollectible accounts expense to be 1% of 2011 credit sales.

Required

a.   Record the events in T-accounts, including closing the revenue and expense accounts to retained earnings.

b.   Record the events using the horizontal financial statements model under the titles of the affected accounts. Record a zero under each heading not affected by a given event. Compare the final balances in the T-accounts from Part a with the ending balances in the horizontal financial statements model.

Problem 7-1 Workpaper, part a. T-accounts, 2010

	Ledger T-Accounts
	Cash			Liabilities			Retained Earnings
	Bal.     3,000							3,940 Bal.
	Accounts Receivable						Services Revenue
	Bal.     1,000	960
	Allow. for Doubt. Accts.						Bad Debts Expense
		60 Bal.

Problem 7-1 Workpaper, part b. Horizontal Financial Statements Model, 2010

Event

Assets

=

Liab.

+

Equity

Rev.

–

Exp.

=

Net Inc.

Cash Flow

No.

Cash

+

Accts. Rec.

+

(Allow.)

=

Ret. Earn.

Beg. bal.

0

+

0

+

0

=

0

+

0

0

–

0

=

0

0

1.

0

+

+

=

+

–

=

2.

+

+

=

+

–

=

3.

+

+

=

+

–

=

Totals

3,000

+

1,000

+

(60)

=

0

+

3,940

4,000

–

60

=

3,940

3,000 NC

Problem 7-1 Workpaper, part a. T-accounts, 2011

	Ledger T-Accounts
	Cash			Liabilities			Retained Earnings
	Bal.     3,000	0						3,940 Bal.
							0
							0	10,375
	Bal.     8,405	0
	Accounts Receivable						Services Revenue
	Bal.     1,000
		0
	Bal.     2,060	0
	Allow. for Doubt. Accts.						Bad Debts Expense
		60 Bal.
	0
	0	90 Bal.

Problem 7-1 Workpaper, part b. Statements Model, 2011

Event

Assets

=

Liab.

+

Equity

Rev.

–

Exp.

=

Net Inc.

Cash Flow

No.

Cash

+

Accts. Rec.

+

(Allow.)

=

Ret. Earn.

Beg. bal.

3,000

+

1,000

+

(60)

=

0

+

3,940

0

–

0

=

0

0

1.

+

+

=

+

–

=

2.

+

+

=

+

–

=

3.

+

+

=

+

–

=

4.

+

+

=

+

–

=

5.

+

+

=

+

–

=

6.

+

+

=

+

–

=

Totals

8,405

+

2,060

+

(90)

=

0

+

10,375

6,500

–

65

=

6,435

5,405 NC

Answer 1

Ledger T-Accounts
	Cash			Liabilities			Retained Earnings
	Bal.     3,000	0						3,940 Bal.
							0	6435
							0	10,375
	Bal.     8,405	0
	Accounts Receivable						Services Revenue
	Bal.     1,000							6500
	6500	40					6500
	$5	5400
		$5
	Bal.     2,060	0
	Allow. for Doubt. Accts.						Bad Debts Expense
		60 Bal.					65	65
	40	5
		65
	0	90 Bal.
Problem 7-1 Workpaper, part b. Statements Model, 2011
Event		Assets					=	Liab.	+	Equity		Rev.	–	Exp.	=	Net Inc.		Cash Flow
No.		Cash	+	Accts. Rec.	+	(Allow.)	=			Ret. Earn.
Beg. bal.		3000	+	1000	+	-60	=	0	+	3940		0	–	0	=	0		0
1				-40		40
2				6500						6500		6500				6500		0
3		5400	+	-5400	+		=		+				–		=			5400	OA
4			+	$5	+	-5	=		+				–		=			0
5		$5	+	($5)	+		=		+				–		=			$5	OA
6			+		+	-65	=		+	-65			–	65	=	-65		0
Totals		8405	0	2060	0	-90	0	0	0	10375	0	6500	0	65	0	6435	0	5405

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