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HI5001 ACCOUNTING FOR BUSINESS DECISIONS outstanding and the increased likelihood that it will not be collected. It is also more consistent
Tutorial Topic 8 with the conceptual framework, focusing on valuation of assets.
Receivables
5. The two main ways of determining the allowance for doubtful debts are sometimes referred to
as the ‘balance sheet’ and the ‘income statement’ approach. To which method does each term
Reading: Hoggett & Edwards Chapter Eighteen refer, why and which would be more appropriate under the IASB’s Conceptual Framework?
Questions: Hoggett & Edwards Chapter 18
Discussion Questions: 1, 2, 3 & 5 • The ageing of accounts receivable method is based on the accounts receivable in the
Exercises: 18.6, 18.8 & 18.9 statement of financial position (balance sheet) at the end of the period. Being based on the
Problems: 18.5, 18.7, 18.8, 18.9 & 18.10
actual accounts receivable outstanding at that point in time the figure calculated determines
Critical Thinking Case
the figure that should be presented in the balance sheet as the allowance for doubtful debts,
Ethical Issues
DISCUSSION and the expense flows from the required adjustment. It can be argued this is more consistent
QUESTIONS with the conceptual framework as the change in asset determines the expense.
SOLUTIONS
1. Compare and contrast accounts receivable and bills receivable • The percentage of credit sales method is based on the sales made during the year. This figure
is obviously found in the income statement. The calculation ‘matches’ the doubtful debts
Accounts Receivable are specifically those accounts that arise from the sale of goods and expense to the sales revenue they generated. That expense is then added to the outstanding
services on credit in the ordinary course of business. They are less proscriptive than bills
allowance to calculate a new balance for the contra-asset. This is an older conceptual
receivable and don’t require formal acceptance, charge no interest and specify terms on which
payment is expected to be made. approach which could be argued to no longer be theoretically correct.
Bills receivable are a much more formal legal document used for extending credit in a range
of circumstances. Bills receivable have four essential features. They must be an unconditional
order, made in writing, involving three parties and include a specific payment date.
Exercise 18.6 Doubtful debts – ageing method
2. ‘Having accounts receivable means by definition that there will be bad debts; therefore it
makes no sense for an organisation to extend credit.’ Discuss.
SANYAM – SOLICITOR
The organisation must consider the cost of extending credit against the benefits to be gained.
The costs certainly include the risk of bad debts, along with record keeping and control. Also Required :
the lost earnings while waiting to receive the money from a sale that would otherwise have A. Prepare the appropriate general journal entries.
been for cash should be considered. This needs to be balanced against the benefit of increased B. Prepare and balance the Allowance for Doubtful Debts account at 30 June 2013.
sales (or forgone lost sales) due to customers choosing to transact based on the credit terms. C. Show the amount(s) to be charged as bad debts expense for the year.
The decision of whether to extend credit or not will depend largely on the industry the
organisation operates in, the expectations of customers and actions of competitors.
A.
3. ‘Determining the amount of the allowance for doubtful debts by simply using a percentage of
net sales is the obvious way to do it — the alternatives are complicated and onerous.’ June 30 Bad Debts Expense $10 600
Discuss. Allowance for Doubtful Debts $10 600
The percentage of credit sales approach to measurement, if based on past experience and a (Required Allowance is $23 500 – Opening
consideration of current economic conditions, is simple to apply and probably less costly than Allowance $21 500 + Bad Debts $8 600)
the ageing of accounts receivable technique. It could be argued as well that the percentage of
sales approach gives a better association of the expense against income/revenue. However, Allowance for Doubtful Debts 8 600
the ageing of accounts receivable technique is likely to provide a better measure of the
Accounts Receivable 8 600
collectible amount of receivables as shown on the entity’s balance sheet at the end of the
accounting period. As it focuses on the source of bad debts, outstanding accounts receivable (Wrote off bad debts)
B.
2013
30 June Bad Debts Expense 41 920
Allowance for Doubtful Debts 41 920
(Adjustment to increase Allow for Doubtful Debts B.
to amount calculated)
1.
2014
30 June Bad Debts Expense 20 070 Allowance for Doubtful Debts
Allowance for Doubtful Debts 20 070 30/6 Balance $1 500
(Adjustment to increase Allow for Doubtful Debts 30/6 Balance c/d $21 100 30/6 Adjusting 19 600
to amount calculated) $21 100 $21 100
30/6 Balance b/d $21 100
2.
Problem 18.5 Doubtful debts – net credit sales and ageing methods
Allowance for Doubtful Debts
D. Problem 18.7 Doubtful debts – net credit sales and ageing methods
1.
PARSON’S BUILDERS PTY LTD
Allowance for Doubtful Debts
30/6 Balance $850 30/6 Adjusting $19 600 Required:
A. Prepare journal entries for each of the transactions.
30/6 Balance c/d 18 750 B. Determine (1) the balance in the Allowance for Doubtful Debts account after the 30 June
$19 600 $19 600 adjustment, and (2) the expected collectable amount of the accounts receivable as at 30 June.
C. Assume that instead of basing the allowance for doubtful debts on net credit sales, the
Balance b/d $18 750 estimate of uncollectable accounts is based on an ageing of accounts receivable and that $11
2. 630 of the accounts receivable as at 30 June was estimated to be uncollectable. Determine:
1. the general journal entry to bring the allowance account to the desired balance
Allowance for Doubtful Debts 2. the expected collectable amount of the accounts receivable as at 30 June.
30/6 Balance $850 30/6 Adjusting $22 318
30/6 Balance c/d 21 468
$22 318 $22 318 A.
Balance b/d $21 468
18 July Allowance for Doubtful Debts $510
GST Collections 51
Accounts Receivable – J Brooks $561
E. The net credit sales method and the ageing of accounts receivable method both calculate a To write off bad debt.
different balance for the Allowance for Doubtful Debts. The net credit sales method
calculates the adjusting entry for Bad Debts Expense as a percentage of net credit sales. The
19 Oct Accounts Receivable – J Fuller 1 562
calculation forms the basis of the adjusting entry. The ageing of an accounts receivable
calculates a required ending balance for the Allowance for Doubtful Debts. The adjusting Bad Debts Recovered 1 420
entry for Bad Debts Expense is calculated by taking into account any opening balance in the GST Collections 142
allowance account to achieve the desired ending balance. Since the two methods involve To record bad debt recovered.
calculations based on different amounts the resulting balances on Allowance for Doubtful
Debts accounts will be different, and hence the net accounts receivable disclosed in the
balance sheet will also be different. Oct 19 Cash at Bank 1 562
Accounts Receivable – J Fuller 1 562
To record cash received from debtor.
1.
GST Collections 96
To record bad debt recovered.
30 June Bad Debts Expense 9 465 Balance in allowance account before 30 June adjustment Cr $1 530
Allowance for Doubtful Debts 9 465 ($9 300 - $7 770)
Balance day adjustment.
Desired year-end balance Cr 11 630
2.
Problem 18.8 Ageing of accounts receivable and adjustment of Accounts Receivable – Cathy $12 353
allowance Write-off Cathy account.
Required:
D. There appears to be a problem with the estimation of the allowance for doubtful debts. The
A. Use the Ageing Analysis of Accounts Receivable to estimate the bad debts amount
B. Prepare the general journal adjusting entry to record estimated bad debts on 30 June 2013. write-off of Cathy’s account has wiped out the allowance for doubtful debts and given a
C. Give the entry to write off the account of Cathy in August 2013, $12 353. significant debit balance. While this will be addressed when the account is replenished at the
D. Do you have any comments or observations on Mynn’s Moving Pty Ltd’s credit policies? end of the period it represents an under-provision in the previous period and and over
estimation of profit. Mynn would be well advised to review large outstanding accounts. Of
particular concern is Derek who has been extended additional credit while owing money from
A.
6 months previously, this is poor credit control.
Current $43,021.00 1% $430.21
30 – 60 4%
days
outstanding
$3,245.00 $129.80 Problem 18.9 Bills receivable, including discounting
61 – 90 $9,746.00 10%
days
outstanding ADRIENNE LTD
$974.60
90 – 180 $12,353.00 25% Required:
days A. Determine the due date and the maturity value for each bill; for bills 1, 2 and 5, determine also the
outstanding discount period, the amount of discount, and the net proceeds.
$3,088.25 B. Prepare journal entries to record the discounting of bills 1, 2 and 5 at the bank.
180+ days $2,596.00 60% C. Prepare a general journal entry to accrue interest on bills 3, 4 and 6 on 30 June.
outstanding D. Prepare general journal entries to record the collection of bills 3, 4 and 6 in the next financial
$1,557.60 year.
E. Prepare journal entries, if any, to record effect of bill 5 being dishonoured.
Estimated Bad Debts (inc GST): $6,180.46
Estimated Bad Debts (ex. GST): $5,618.60
B.
B.
Required:
A. Calculate the following for years 2014 and 2015:
A.
2014 2015
Receivables turnover ratio:
Net credit sales revenue $1 120 000 $1 130 000
Average receivables ($102 000 + $108 000)/2 ($108 000 + $124 000)/2
= 10.67 times = 9.74 times
Average collection period 365 days 365 days
10.67 9.74
= 34 days = 37days
B. The 2014 and 2015 ratios indicate a relaxation of credit collection policy. In 2014 receivables
turned over or were paid in full 10.67 times a year compared to 9.74 times in 2015. The
position has worsened between 2014 and 2015. This trend needs to be addressed and reversed
as soon as possible.
This is also emphasised in the average collection period - the days it took to collect accounts
receivables in full increased from 34 days in 2014 to 37 days in 2015. If the credit policy
allows for payment in 30 days it appears, on average, debtors were paying within a reasonable
time period in 2014, but this has worsened in 2015. If the trend is not addressed, cash flow
problems could arise in the future.
A review of the credit department to examine existing credit policies could be undertaken.
The procedures for assessing credit worthiness of potential customers, continuous monitoring
of accounts receivable using ageing analysis, communications with customers, and collection
procedures for slow payers would be required.