Question

Required information Exercise 7-7A Effect of recognizing uncollectible accounts on the financial statements: Percent of receivables allowance method LO 7-2 [The following information applies to the questions displayed below.) Leach Inc. experienced the following events for the first two years of its operations: Year 1: 1. Issued $10,000 of common stock for cash. 2. Provided $78,000 of services on account. 3. Provided $36,000 of services and received cash. 4. Collected $69,000 cash from accounts receivable. 5. Paid $38,000 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. Year 2: 1. Wrote off an uncollectible account for $650. 2. Provided $88,000 of services on account. 3. Provided $32,000 of services and collected cash. 4. Collected $81,000 cash from accounts receivable. 5. Paid $65,000 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.

Answer 1

Year 1: Journal Entries

Transaction	General Journal	Debit	Credit
1	Cash	10,000
	Common Stock		10,000
	(To record cash received from common stock)
2	Accounts Receivable	78,000
	Service Revenue		78,000
	(To record service revenue)
3	Cash	36,000
	Service Revenue		36,000
	(To record service revenue)
4	Cash	69,000
	Accounts Receivables		69,000
	(To record cash received from accounts receivables)
5	Salaries Expenses	38,000
	Cash		38,000
	(To record the Salaries expense)
6	Uncollectible accounts expense	450
	Allowance for doubtful debts		450
	(To record allowance (78,000-69,000*5%))
7	Service Revenue	114,000
	Retained Earnings		114,000
	(To Record Income)
8	Retained Earnings	38,450
	Uncollectible accounts expense		450
	Salaries Expense		38,000

1. Income Statement

LEACH Inc. Income Statement For the year Ended December 31,Year 1
Service Revenue		114,000
Operating Expenses
Salaries Expense	38,000
Uncollectible accounts expense	450
Total Operating Expenses		38,450
Net Income		75,550

2. Statement of Change in Stockholders' Equity

LEACH Inc. Statement of Change in Stockholders' Equity For the year Ended December 31,Year 1
Beginning Common Stock	0
Issued during the year	10,000
Ending Common Stock		10,000
Beginning Retained Earnings	0
Add:Net Income	75,550
Ending Retained Earnings		75,550
Total Stockholders' Equity		85,550

3.Balance Sheet

LEACH Inc. Balance Sheet For the year Ended December 31,Year 1
Assets
Cash (10,000+36,000+69,000-38,000)		77,000
Accounts Receivables(78,000-69,000)	9,000
Less: Allowance for doubtful debts (9,000*5%)	450	8,550
Total Assets		85,550
Liabilities
Stockholders' Equity
Common Stock	10,000
Retained Earnings	75,550
Total Stockholders' Equity		85,550
Total Liabilities and Stockholders' Equity		85,550

4. Statement of Cash Flows

LEACH Inc. Statement of Cash Flows For the year Ended December 31,Year 1
Cash Flows from operating activities
Inflow from Customers (36,000+69,000)	105,000
Outflow for Expenses
Salaries Expense	38,000
Net Cash flow from Operating Expenses		67,000
Cash Flow from Investing Activities		-
Cash Flow from Financing Activities
Inflow from issue of Common Stock		10,000
Net Change in Cash		77,000
Ending Cash Balance		77,000