Accounting for uncollectible accounts: two cycles using the percent of revenue allowance method The following transactions apply to Jova Company for 2016, the first year of operation:
1. Issued $10,000 of common stock for cash.
2 . Recognized $210,000 of service revenue earned on account.
3. Collected $162,000 from accounts receivable.
4 . Paid $125,000 cash for operating expenses.
5 . Adjusted the accounts to recognize uncollectible accounts expense. Jova uses the allowance method of accounting for uncollectible accounts and estimates that uncollectible accounts expense will be 1 percent of sales on account.
The following transactions apply to Jova for 2017:
1. Recognized $320,000 of service revenue on account.
2. Collected $335,000 from accounts receivable.
3. Determined that $2,150 of the accounts receivable were uncollectible and wrote them off.
4. Collected $800 of an account that had previously been written off.
5. Paid $205,000 cash for operating expenses.
6. Adjusted the accounts to recognize uncollectible accounts expense for 2017. Jova estimates uncollectible accounts expense will be 0.5 percent of sales on account.
Required
Complete the following requirements for 2016 and 2017. Complete all requirements for 2016 prior to beginning the requirements for 2017.
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 1 for increase, 2 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. Record the transactions in general journal form and post them to T-accounts (begin 2017 with the ending T-account balances from 2016).
d. Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows.
e. Prepare closing entries and post these closing entries to the T-accounts. Prepare the postclosing trial balance.