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Uncollectible accounts using percent of revenue method

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Survey of Accounting

Problem 5-17 Accounting for uncollectible accounts, two cycles, using the percent of revenue allowance method

The following transactions apply to Puretz Consulting for 2010, the first year of operation.

1. Recognized $75,000 of service revenue earned on account.
2. Collected $62,000 from accounts receivable.
3. Adjusted accounts to recognize uncollectible accounts expense. Puretz 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 Puretz Consulting for 2011.
1. Recognized $86,500 of service revenue on account.
2. Collected $85,000 from accounts receivable.
3. Determined that $1,120 of the accounts receivable were uncollectible and wrote them off.
4. Collected $500 of an account that had been previously written off.
5. Paid $52,600 cash for operating expenses.
6. Adjusted accounts to recognize uncollectible accounts expense for 2011. Puretz estimates that uncollectible accounts expense will be 1 percent of sales on account.

Required:

Complete all the following requirements for 2010 and 2011. Complete all requirements for 2010 prior to beginning the requirements for 2011.

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. (Hint: Closing entries do not affect the statements model.)
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.

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Solution Summary

I put the work in a financial effects template that you can use to complete all the aspects. Your four types did not include adjusting entries (AJE) so I added that as a classification in that column. Formulas are in cells.

Solution Preview

See the attached file.

Notice that the "method" of accounting for bad debts changed from 2010 to ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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