Demonstration Problems for Chapter 8
Demonstration Problem 8-1 Accounting for Bad Debts
The Solo Company was started on January 1, 2003. The following events occurred during 2003 and 2004.
2003
1. Provided $4,000 of services on account.
2. Collected $3,000 cash from accounts receivable.
3. Estimated uncollectible accounts expense to be 1.5 percent of 2003 credit sales.
2004
1. Wrote off $40 of accounts receivable that were deemed uncollectible.
2. Provided $6,500 of services on account.
3. Collected $5,400 cash from accounts receivable.
4. Received $5 from a bad debt that had been previously written off. Reinstated the account.
5. Recorded the $5 cash received from the receivable reinstated in Event No. 4.
6. Estimated uncollectible accounts expense to be 1 percent of 2004 credit sales.
Required
a. Record the events in T-accounts, including closing the revenue and expense accounts to retained earnings.
b. Record the events in a statements model under the titles of the affected accounts. Record a zero under each
heading not affected by a given event. Compare the final balances in the T-accounts from part a with the
ending balances in the statements model.
Demonstration Problem 8-2 Credit Card Sales and Warranty Expense
Versa Training Services provides instruction on how to pass the CPA examination. Versa has attained
phenomenal growth by offering its customers a money-back guarantee. Any student who attends all classes and
completes all homework assignments is entitled to a complete refund if he or she fails to pass the exam. The
following events pertain to a new course that was recently established by Versa.
1. Versa accepted credit card payments for $8,000 of instructional services it provided to CPA exam
candidates. The credit card company charged Versa a 5 percent service fee.
2. Versa collected the receivable due from the credit card company.
3. Versa estimated that 20 percent of the students would fail the exam and demand a cash refund. Versa
agreed to provide cash back to its customers even though the customers had paid for the review course with
a charge card.
4. Versa paid a $400 cash refund to a customer after he received his exam results. This refund was the first of
several Versa expected to grant to unsuccessful candidates.
Required
a. Record the events in T-accounts, including closing the revenue and expense accounts to retained earnings
b. Record the events in a statements model under the titles of the affected accounts. Record a zero under each
heading not affected by the event. Compare the final balances in the T-accounts from part a with the ending
balances in the statements model.
Demonstration Problem 8-3 Discount Note
Computer Consultants experienced the following accounting events in its first year of operation.
1. The company was started on April 1, 2003 when it issued a $5,000 face value discount note to State Bank.
The note had a 12 percent discount rate and a one-year term.
2. Paid $4,200 cash for operating expenses.
3. Recognized $7,300 of cash service revenue.
4. Recognized accrued interest expense at December 31, 2003.
Accounting events affecting 2004 were as follows:
1. On April 1, 2004 Computer Consultants recognized the final three months of accrued interest expense on
the discount note.
2. Paid State Bank the face value of the note.
3. Recognized $9,500 of cash service revenue.
4. Paid $6,400 cash for operating expenses.
Required
a. Record the events for 2003 and 2004 in T-accounts.
b. Record the events for 2003 and 2004 in a statements model.
Demonstration Problem 8-1 Work Paper, part a. T-accounts, 2003
Ledger T-Accounts
Cash
Liabilities
Retained Earnings
Accounts Receivable
Services Revenue
Allow. for Doubt. Accts.
Bad Debts Expense
Demonstration Problem 8-1 Work Paper, part b. Statements Model, 2003
Event
No.
Beg. Bal.
1.
2.
3.
Totals
Assets
Acct.
Cash + Rec. + (Allow)
-0- +
-0- +
-0+
+
+
+
+
+
3,000 + 1,000 + (60)
= Liab. + Equity
=
=
=
=
=
=
Ret. Ear.
-0- +
-0+
+
+
-0- + 3,940
Rev. – Exp. = Net Inc.
-0- –
–
–
–
4,000 –
-0- =
-0=
=
=
60 = 3,940
Cash Flow
-0-
+3,000 NC
Demonstration Problem 8-1 Work Paper, part a. T-accounts, 2004
Ledger T-Accounts
Bal.
Cash
3,000
Liabilities
Retained Earnings
3,940 Bal.
Accounts Receivable
Bal. 1,000
Services Revenue
Allow. for Doubt. Accts.
60 Bal.
Bad Debts Expense
Demonstration Problem 8-1 Work Paper, part b. Statements Model, 2004
Event
No.
Beg. Bal.
1.
2.
3.
4.
5.
6.
Totals
Assets
Acct.
Cash + Rec. + (Allow)
3,000 + 1,000 + (60)
+
+
+
+
+
+
+
+
+
+
+
+
8,405 + 1,560 + (90)
= Liab. + Equity
=
=
=
=
=
=
=
=
=
Ret. Ear.
-0- + 3,940
+
+
+
+
+
+
-0- + 10,375
Rev. – Exp. = Net Inc.
-0- –
–
–
–
–
–
–
6,500 –
-0- =
=
=
=
=
=
=
65 =
-0-
6435
Cash Flow
-0-
+5,405 NC
Demonstration Problem 8-2 Work Paper, part a. T-accounts
Ledger T-Accounts
Warranty Payable
Cash
Accounts Receivable
Retained Earnings
Services Revenue
Credit Card Expense
Warranty Expense
Demonstration Problem 8-2 Work Paper, part b. Statements Model
Event
No.
Beg. Bal.
1.
2.
3.
4.
Totals
Assets
Acct.
Cash + Rec.
-0- +
-0+
+
+
7,200 +
= Liab. + Equity
= W. Pay Ret. Ear.
=
-0- +
-0=
+
=
+
+
=
+
-0- = 1,200 + 6,000
Rev. – Exp. = Net Inc.
Cash Flow
-0- –
-0- =
-0–
=
–
=
–
=
–
=
8,000 – 2,000 = 6,000
-0-
+7,200 NC
Demonstration Problem 8-3 Work Paper, part a. 2003 T-accounts
2003 Ledger T-Accounts
Cash
Notes Payable
Retained Earnings
Discount on Note Pay.
Service Revenue
Operating Expense
Interest Expense
Demonstration Problem 8-3 Work Paper, part b. Statements Model, 2003
Event
No.
Assets =
Liabilities
+ Equity
Cash = Note Pay. + (Disc.) + Ret. Ear.
Beg. Bal.
-0- =
-0- +
-0- +
-01.
=
+
+
2.
=
+
+
3.
+
+
4.
=
+
+
Totals
7,500 = 5,000 + (150) + 2,650
Rev. – Exp. = Net Inc.
Cash Flow
-0- –
-0- =
-0–
=
–
=
–
=
–
=
7,300 – 4,650 = 2,650
-0-
+7,500 NC
Demonstration Problem 8-3 Work Paper, part a. 2004 T-accounts
2004 Ledger T-Accounts
Bal.
Cash
7,500
Notes Payable
5,000 Bal.
Discount on Note Pay.
Bal.
150
Retained Earnings
2,650 Bal.
Service Revenue
Operating Expense
Interest Expense
Demonstration Problem 8-3 Work Paper, part b. Statements Model, 2004
Event
No.
Assets =
Liabilities
+ Equity
Cash = Note Pay. + (Disc.) + Ret. Ear.
Beg. Bal. 7,500 = 5,000 + (150) + 2,650
1.
=
+
+
2.
=
+
+
3.
=
+
+
4.
=
+
+
Totals
5,600 =
-0- +
-0- + 5,600
Rev. – Exp. = Net Inc.
Cash Flow
-0- –
-0- =
-0–
=
–
=
–
=
–
=
9,500 – 6,550 = 2,950
-0-
(1,900) NC