Question

Using the Balance Sheet Equation, account for the following transactions:

Image Supply:

1. Image Supply sells $500,000 worth of services on account to various customers
2. Image collects $300,000 from customers on account
3. Image writes-off Customer D because they are unable to collect the accounts receivable; Customer D owes $1,000 (Image uses the Direct Write-Off Method)

PART B:

Strand Corp uses the Allowance Method

Using the Balance Sheet Equation, account for the following transactions:

1) At 12/31/17, the balance in Strand Corps accounts receivable $175,000 and Strand estimates uncollectable accounts to be 10% of accounts receivable balance at 12/31/17

2) After #1 ABOVE, Strand writes-off a specific account that owes the company $10,000

#3) After #2 above, show the co's Net Realizable Balance schedule at 12/31/17

NOTE: as always, show ALL your work for partial credit

Answer 1

Image:

Balance sheet equation is as below:

Assets = Liabilities + Capital

Transaction	Assets	=	Liabilities	+	Capital
a.	+ $500,000	=	0	+	+ $500,000
Total	500,000	=	0	+	500,000
b.	+ $300,000; - $300,000	=	0	+	0
Total	500,000	=	0	+	500,000
c.	- $1,000	=	0	+	-$1,000
Total	499,000	=	0	+	499,000

Explanations:

(a). Sale of image of $500,000 increases accounts receivable, since the services are on account; accounts receivable is a part of assets; therefore, assets increase. It increases capital too, since this is revenue earning.

(b). Collection of cash of $300,000 increases cash and decreases accounts receivable; since both are assets, it increases and decreases at the same time with the same amount.

(c). Direct write-off of $1,000 decreases both assets and capital, since it reduces accounts receivable and increases bad debt expenses.

S. Corp:

Balance sheet equation is as below:

Assets = Liabilities + Capital

Transaction	Assets	=	Liabilities	+	Capital
a.	-$17,500	=	0	+	-$17,500
Total	-17,500	=	0	+	-17,500
b.	+ $10,000; - $10,000	=	0	+	0
Total	-17,500	=	0	+	-17,500

Explanations:

(a). Uncollectable amount is (175,000 × 10% =) $17,500. It increases bad debt; therefore, capital decreases. It increases allowance for bad debt, which is contra of accounts receivable; therefore, it decreases capital too.

(b). The write-off of $10,000 (allowance method) increases assets, since the allowance for bad debt is debited; it decreases assets again, since accounts receivable is credited.

#3

Net realizable schedule

At 12/31/17

	Before write-off	After write-off
Accounts receivable	$175,000	$165,000
Less: Allowance for bad debts	-$17,500	-$7,500
Net realizable value	$157,500	$157,500

Explanations:

No.1) There are two columns – before and after. In the before column, the total amount of accounts receivable should come; in the after column, accounts receivable would appear by a subtraction of write-off amount; (175,000 – 10,000 =) $165,000.

No.2) If there is no write-off, the whole allowance balance should appear as $17,500. If there is write-off, only the balance amount in allowance account (17,500 – 10,000 =) $7,500 should appear.

No.3) the net realizable value must be equal at the end in these two cases.