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