Accounting for uncollectible accounts—two cycles using the percent of revenue allowance me...

Accounting for uncollectible accounts—two cycles using the percent of revenue allowance method

The following transactions apply to Sharp Consulting for 2012, the first year of operation:

1. Recognized $65,000 of service revenue earned on account.

2. Collected $58,000 from accounts receivable.

3. Adjusted accounts to recognize uncollectible accounts expense. Sharp uses the allowance method of accounting for uncollectible accounts and estimates that uncollectible accounts expense will be 2 percent of sales on account.

The following transactions apply to Sharp Consulting for 2013:

1.Recognized $72,500 of service revenue on account.

2.Collected $66,000 from accounts receivable.

3.Determined that $900 of the accounts receivable were uncollectible and wrote them off.

4.Collected $100of an account that had been previously written off.

5.Paid $48,500 cash for operating expenses.

6.Adjusted accounts to recognize uncollectible accounts expense for 2012. Sharp estimates that uncollectible accounts expense will be 1 percent of sales on account.

Required

Complete all the following requirements for 2012 and 2013. Complete all requirements for 2012 prior to beginning the requirements for 2013.

a.Identify the type of each transaction (asset source, asset use, asset exchange, or claims exchange).

b.Show the effect of each transaction on the elements of the financial statements, using a horizontal statements model like the one shown here. Use + for increase, − for decrease, and NA for not affected. Also, in the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). The first transaction is entered as an example.

c.Organize the transaction data in accounts under an accounting equation.

d.Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows.