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 $27,000 of common stock for cash.
2. Provided $96,700 of services on account.
3. Provided $53,000 of services and received cash.
4. Collected $86,000 cash from accounts receivable.
5. Paid $55,000 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 $820.
2. Provided $105,000 of services on account.
3. Provided $49,000 of services and collected cash.
4. Collected $98,000 cash from accounts receivable.
5. Paid $82,000 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

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.)
  

Answer 1

Year 1

Income Statement
Revenues
Service Revenue	$           1,49,700
Total Revenues		$          1,49,700
Expenses
Salaries Expense	$              55,000
Bad debt Expense	$                    535		=(96700-86000)*5%
Total Expenses		$              55,535
Net Income		$              94,165
Statement of Stockholders Equity
	Common Stock	Retained Earnings	Total
Beginning Balance	$                       -	$                       -	$                       -
Add Stock issued	$              27,000		$              27,000
Add Net Income	$                       -	$              94,165	$              94,165
	$              27,000	$              94,165	$           1,21,165
Less Dividend	$                       -	$                       -	$                       -
Ending Balance	$              27,000	$              94,165	$          1,21,165
Balance Sheet
Assets
Current Assets
Cash	$           1,11,000
Accounts Receivable	$              10,700
Less Allowance for Doubtful debts	$                  -535
Total Current Assets		$          1,21,165
Liabilities & Stockholder's Equity
Current Liabilities
Total Current Liabilities		$                       -
Stockholder's Equity
Common Stock	$              27,000
Retained Earnings	$              94,165
Total Stockholder's Equity		$          1,21,165
Total Liabilities & Stockholder's Equity		$          1,21,165
Cash Flow Statement
Direct Method
Cash flow from Operating Activities
Cash Collected from customers		$     1,39,000.00
Cash paid for Salaries		$       -55,000.00
Cash from operating activities			$        84,000.00
Cash flow from Investing Activities
Cash used in investing activities			$                       -
Cash flow from Financing Activities
Issue of Stock		$        27,000.00
Cash from financing activities			$        27,000.00
Net Increase in cash			$     1,11,000.00
Opening Balance of Cash			$                       -
Closing Balance of Cash			$     1,11,000.00