E7-16 (Supplement) Recording Write-Offs and Reporting ...



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E7-16 (Supplement) Recording Write-Offs and Reporting Accounts Receivable Using

the Direct Write-Off Method

Trevorson Electronics is a small company privately owned by Jon Trevorson, an electrician who installs wiring in new homes. Because the company’s financial statements are prepared only for tax purposes, Jon uses the direct write-off method. During 2005, its first year of operations, Trevorson Electronics sold $30,000 of services on account. The company collected $26,000 of these receivables during the year, and Jon believed that the remaining $4,000 was fully collectible. In 2006, Jon discovered that none of the $4,000 would be collected, so he wrote off the entire amount. To make matters worse, Jon sold only $5,000 of services during the year.

Required:

1. Prepare journal entries to record the transactions in 2005 and 2006.

2. Using only the information provided (ignore other operating expenses), prepare comparative income statements for 2005 and 2006. Was 2005 really as profitable as indicated by its income statement? Was 2006 quite as bad as indicated by its income statement? What should Jon do if he wants better information for assessing his company’s ability to generate profit?

Req. 1

2005

dr. Accounts receivable (+A) 30,000

cr. Service revenue (+R,+SE) 30,000

dr. Cash (+A) 26,000

cr. Accounts receivable (-A) 26,000

2006

dr. Bad debt expense (+E,-SE) 4,000

cr. Accounts receivable (-A) 4,000

dr. Accounts receivable (+A) 5,000

cr. Service revenue (-A) 5,000

Req. 2

|Trevorson Electronics |

|Income Statement |

|For the years ended December 31 |

| | |2005 | |2006 |

|Service revenue | |$30,000 | |$5,000 |

|Operating expenses | | | | |

|Bad debt expense | | | |4,000 |

|Net income | |$30,000 | |$1,000 |

2005 was not as profitable as indicated because $4,000 of the revenue reported was not going to be collected. 2006 was not as bad as indicated because $4,000 of bad debt expense actually belonged to revenues from the previous year. To receive better information about profitability, Jon needs to use the allowance method of accounting for uncollectible accounts.

PA4-5 Comprehensive Review Problem: From Recording Transactions (including

Adjusting Journal Entries) to Preparing Financial Statements and Closing Journal

Entries (Chapters 2, 3, and 4)

Drs. Glenn Feltham and Gary Entwistle began operations of their physical therapy clinic called Northland Physical Therapy on January 1, 2005. The annual reporting period ends December 31.

The trial balance on January 1, 2006, was as follows (the amounts are rounded to thousands of dollars to simplify):

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Req. 1, 2, 4, and 7 (T-accounts)

| | |+ Accounts Receivable (A) - | | |

|+ Cash (A) - | | | |+ Supplies (A) - |

|Bal. 7 |b 20 | |Bal. 3 |g 9 | |Bal. 3 |m 7 |

|a 22 |e 25 | |d 8 | | |i 8 | |

|c 5 |f 3 | | | | | | |

|d 47 |h 7 | | | | | | |

|g 9 |l 4 | | | | | | |

|j 3 | | | | | | | |

|Bal. 34 | | |Bal. 2 | | |Bal. 4 | |

| | | Accumulated | | |

|+ Equipment (A) - | |- Depreciation (xA) + | |+ Other Assets (A) - |

|Bal. 6 | | | |Bal. 1 | |Bal. 6 | |

| b 20 | | | |n 5 | |f 3 | |

|Bal. 26 | | | |Bal. 6 | |Bal. 9 | |

| Accounts | | | | |

|-  Payable (L) + | |- Notes Payable (L) + | |- Wages Payable (L) + |

|h 7 |Bal. 5 | | |a 22 | | |p 2 |

| |e 5 | | | | | | |

| |i 8 | | | | | | |

| |Bal. 11 | | |Bal. 22 | | |Bal. 2 |

| | | Income Taxes | | Unearned |

|- Interest Payable (L) + | |-  Payable (L) + | |- Revenue (L) + |

| |o 1 | | |q 4 | | |j 3 |

| |Bal. 1 | | |Bal. 4 | | |Bal. 3 |

| Dividends | | Contributed | | Retained |

|- Payable (L) + | |- Capital (SE) + | |- Earnings (SE) + |

|l 4 |k 4 | | |Bal. 15 | | |Bal. 4 |

| | | | |c 5 | |CE2 4 |CE1     6 |

| |Bal. 0 | | |Bal. 20 | | |Bal. 6 |

| Dividends +  Declared (D) - | | | | Income Tax +  Expense (E) - |

| | |- Service Revenue (R) + | | |

|k 4 | | | |d 55 | |q 4 | |

| |CE2 4 | |CE1 55 | | | |CE1 4 |

| |Bal. 0 | | |Bal. 0 | |Bal. 0 | |

| | | | | Supplies and Other Operating |

|Interest | |Depreciation | |+  Expenses (E) - |

|+  Expense (E) - | |+  Expense (E) - | | |

|o 1 | | |n 5 | | | e 30 | |

| |CE1 1 | | |CE1 5 | |m 7 | |

| | | | | | |p 2 |CE1 39 |

|Bal. 0 | | |Bal. 0 | | |Bal. 0 | |

Req. 2

|a. |dr. Cash (+A) |22 | |

| | cr. Note payable (+L) | |22 |

| |Borrowed cash on note. | | |

| | | | |

|b. |dr. Equipment (+A) |20 | |

| | cr. Cash ((A) | |20 |

| |Purchased equipment. | | |

| | | | |

|c. |dr. Cash (+A) |5 | |

| | cr. Contributed capital (+SE) | |5 |

| |Sold capital stock for cash. | | |

| | | | |

|d. |dr. Cash (+A) |47 | |

| |dr. Accounts receivable (+A) |8 | |

| | cr. Service revenue (+R, +SE) | |55 |

| |Service revenues earned. | | |

| | | | |

|e. |dr. Supplies and other operating expenses (+E, (SE) |30 | |

| | cr. Accounts payable (+L) | |5 |

| | cr. Cash ((A) | |25 |

| |Operating expenses incurred. | | |

| | | | |

|f. |dr. Other assets (+A) |3 | |

| | cr. Cash ((A) | |3 |

| |Purchased additional assets. | | |

| | | | |

|g. |dr. Cash (+A) |9 | |

| | cr. Accounts receivable ((A) | |9 |

| |Collected on customers' accounts. | | |

| | | | |

|h. |dr. Accounts payable ((L) |7 | |

| | cr. Cash ((A) | |7 |

| |Paid on accounts payable to suppliers. | | |

| | | | |

|i. |dr. Supplies (+A) |8 | |

| | cr. Accounts payable (+L) | |8 |

| |Purchased services supplies for future use. | | |

| | | | |

|j. |dr. Cash (+A) |3 | |

| | cr. Unearned revenue (+L) | |3 |

| |Deposit received for revenue not yet earned. | | |

| | | | |

|k. |dr. Dividends declared (+D,(SE) |4 | |

| | cr. Dividends payable (+L) | |4 |

| | Declared a dividend. | | |

| | | | |

|l. |dr. Dividends payable ((L) |4 | |

| | cr. Cash ((A) | |4 |

| |Paid dividend declared in (k). | | |

Req. 3

Northland Physical Therapy

Unadjusted Trial Balance

At December 31, 2006

(in thousands)

|Account | |Account Titles |Debit | |Credit |

|01 | |Cash |$ 34 | | |

|02 | |Accounts receivable |2 | | |

|03 | |Supplies |11 | | |

|04 | |Equipment |26 | | |

|05 | |Accumulated depreciation (equipment) | | |$ 1 |

|06 | |Other assets |9 | | |

|11 | |Accounts payable | | |11 |

|12 | |Notes payable | | |22 |

|13 | |Wages payable | | | |

|14 | |Interest payable | | | |

|15 | |Income taxes payable | | | |

|16 | |Unearned revenue | | |3 |

|17 | |Dividends payable | | |0 |

|21 | |Contributed capital | | |20 |

|31 | |Retained earnings | | |4 |

|32 | |Dividends declared |4 | | |

|35 | |Service revenue | | |55 |

|40 | |Depreciation expense | | | |

|41 | |Income tax expense | | | |

|42 | |Interest expense | | | |

|43 | |Supplies and other operating expenses |30 | | |

| | | Totals |$116 | |$116 |

Req. 4

|m. |dr. Supplies and other operating |7 | |

| |expenses (+E, (SE) | | |

| | cr. Supplies ((A) | |7 |

| |To record supplies used ($11 – 4). | | |

| | | | |

|n. |dr. Depreciation expense (+E, (SE) |5 | |

| | cr. Accumulated depreciation (+xA, (A) | |5 |

| |To record depreciation as given. |

| | | | |

|o. |dr. Interest expense (+E, (SE) |1 | |

| | cr. Interest payable (+L) | |1 |

| |To accrue interest for July - December, 2006. | | |

| | | | |

|p. |dr. Supplies and other operating |2 | |

| |expenses (wages) (+E, (SE) | | |

| | cr. Wages payable (+L) | |2 |

| |To accrue wages incurred but not paid. | | |

| | | | |

|q. |dr. Income tax expense (+E, (SE) |4 | |

| | cr. Income taxes payable (+L) | |4 |

| |To accrue income tax. | | |

| | | | |

Req. 5

Northland Physical Therapy

Adjusted Trial Balance

At December 31, 2006

(in thousands)

|Account | |Account Titles |Debit | |Credit |

|01 | |Cash |$ 34 | | |

|02 | |Accounts receivable |2 | | |

|03 | |Supplies |4 | | |

|04 | |Equipment |26 | | |

|05 | |Accumulated depreciation (equipment) | | |$ 6 |

|06 | |Other assets |9 | | |

|11 | |Accounts payable | | |11 |

|12 | |Notes payable | | |22 |

|13 | |Wages payable | | |2 |

|14 | |Interest payable | | |1 |

|15 | |Income taxes payable | | |4 |

|16 | |Unearned revenue | | |3 |

|17 | |Dividends payable | | |0 |

|21 | |Contributed capital | | |20 |

|31 | |Retained earnings | | |4 |

|32 | |Dividends declared |4 | | |

|35 | |Service revenue | | |55 |

|40 | |Depreciation expense |5 | | |

|41 | |Income tax expense |4 | | |

|42 | |Interest expense |1 | | |

|43 | |Supplies and other operating expenses |39 | | |

| | | Totals |$128 | |$128 |

Req. 6

Northland Physical Therapy

Income Statement

For the Year Ended December 31, 2006

(in thousands)

|Revenues: | | |

| Service revenue | |$ 55 |

|Expenses: | | |

| Depreciation expense |$ 5 | |

| Interest expense | 1 | |

| Supplies and other operating expenses |39 | 45 |

|Income before income tax expense | |10 |

| Income tax expense | | 4 |

|Net income | |$ 6 |

Northland Physical Therapy

Statement of Retained Earnings

For the Year Ended December 31, 2006

(in thousands)

|Balance, January 1, 2006 | $ 4 |

| Net income | 6 |

| Dividends declared | (4) |

|Balance, December 31, 2006 | $ 6 |

Northland Physical Therapy

Balance Sheet

At December 31, 2006

(in thousands)

|Assets: | | | |Liabilities: | | |

|Current Assets: | | | |Current Liabilities: | | |

|Cash | |$34 | |Accounts payable | |$11 |

|Accounts receivable | |2 | |Notes payable | |22 |

|Supplies | |4 | |Wages payable | |2 |

| Total current assets | |40 | |Interest payable | |1 |

| | | | |Income taxes payable | |4 |

|Equipment |$26 | | |Unearned revenue | |3 |

|Less: Accum. depr. |6 |20 | | Total current liabilities | | 43 |

|Other assets | |9 | | | | |

| | | | |Stockholders' Equity: | | |

| | | | |Contributed capital |$20 | |

| | | | |Retained earnings |6 | |

| | | | | Total stockholders' equity | |26 |

| | | | |Total liabilities and stockholders' equity | | |

|Total assets | |$69 | | | |$69 |

Req. 7

|1 |dr. Service revenue ((R) |55 | |

| | cr. Depreciation expense ((E) | |5 |

| | cr. Interest expense ((E) | |1 |

| | cr. Supplies and other operating expenses ((E) | |39 |

| | cr. Income tax expense ((E) | |4 |

| | cr. Retained earnings (+SE) | |6 |

| | | | |

|2 |dr. Retained earnings ((SE) |4 | |

| | cr. Dividends declared ((D) | |4 |

Req. 8

Northland Physical Therapy

Post-closing Trial Balance

At December 31, 2006

(in thousands)

|Account | |Account Titles |Debit | |Credit |

|01 | |Cash |$34 | | |

|02 | |Accounts receivable |2 | | |

|03 | |Supplies |4 | | |

|04 | |Equipment |26 | | |

|05 | |Accumulated depreciation (equipment) | | |$ 6 |

|06 | |Other assets |9 | | |

|11 | |Accounts payable | | |11 |

|12 | |Notes payable | | |22 |

|13 | |Wages payable | | |2 |

|14 | |Interest payable | | |1 |

|15 | |Income taxes payable | | |4 |

|16 | |Unearned revenue | | |3 |

|17 | |Dividends payable | | |0 |

|21 | |Contributed capital | | |20 |

|31 | |Retained earnings | | |6 |

|32 | |Dividends declared |0 | | |

|35 | |Service revenue | | |0 |

|40 | |Depreciation expense |0 | | |

|41 | |Income tax expense |0 | | |

|42 | |Interest expense |0 | | |

|43 | |Supplies and other operating expenses |0 | | |

| | | Totals |$75 | |$75 |

Req. 9

The business generated $6 (thousand) in net income during 2006. The company is financed primarily by debt, with debt providing financing for $43 (thousand) of total assets and equity providing financing of $26 (thousand).

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