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

1. Provided $26,830 of cleaning services on account.
2. Collected $21,464 cash from accounts receivable.
3. 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

1. Wrote off a $201 account receivable that was determined to be uncollectible.
2. Provided $31,311 of cleaning services on account.
3. Collected $27,710 cash from accounts receivable.
4. Adjusted the accounting records to reflect the estimate that uncollectible accounts expense would be 1 percent of the cleaning revenue on account.

Required
a. Organize the transaction data in accounts under an accounting equation.
b. Determine the following amounts:

1. (1) Net income for Year 1.
2. (2) Net cash flow from operating activities for Year 1.
3. (3) Balance of accounts receivable at the end of Year 1.
4. (4) Net realizable value of accounts receivable at the end of Year 1.

c. Determine the following amounts:

1. (1) Net income for Year 2.
2. (2) Net cash flow from operating activities for Year 2.
3. (3) Balance of accounts receivable at the end of Year 2.
4. (4) Net realizable value of accounts receivable at the end of Year 2.

Answer 1

a. Accounting Equation = Cash + Accounts Receivable + Allowance for Doubtful Debts = Equity

	Cash	Accounts Receivable	Allowance for Doubtful Debts	Equity
Year 1
a		$    26,830.00		$     26,830.00
b	$       21,464.00	$ -21,464.00
c			$         -268.30	$         -268.30
Total	$       21,464.00	$      5,366.00	$         -268.30	$     26,561.70
Year 2
a	$           -201.00		$          201.00
b		$    31,311.00		$ 31,311.00
c	$       27,710.00	$ -27,710.00
d			$         -313.11	$         -313.11
Total	$       48,973.00	$      8,967.00	$         -380.41	$     26,248.59

b.

(1) Net income for Year 1. = $26561.70

(2) Net cash flow from operating activities for Year 1 = $21464

(3) Balance of accounts receivable at the end of Year 1 = $5366

(4) Net realizable value of accounts receivable at the end of Year 1 = $5366 - 268.30 = $5097.70

c.

(1) Net income for Year 2. = $30997.89

(2) Net cash flow from operating activities for Year 2. = $27710

(3) Balance of accounts receivable at the end of Year 2. = $8967

(4) Net realizable value of accounts receivable at the end of Year 2. = $8967 - 380.41 = $8586.59