Identify and organize transactions, prepare an income statement
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The following transactions apply to Sharp Consulting for 2006, 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 the uncollectible accounts expense will be 2 percent of sales on account.
The following transactions apply to Sharp Consulting for 2007:
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 $100 of 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 2007. Sharp estimates that uncollectible accounts expense will be 1 percent of sales on account.
Required
Complete all of the following requirements for 2006 and 2007. Complete all requirements for 2006 prior to beginning the requirements for 2007.
a. Identify the type of each transaction (asset source, asset use, asset exchange, or claims exchange).
b. Show the effects of each transaction on the elements of the financial statements, using a horizontal statement. 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). (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 statements of cash flows.
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Solution Summary
The solution identifies and organizes transactions. An income statement is prepared.
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