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ACCT2511: Financial Accounting Fundamentals Week 4

Topic 3: Accounts Receivable

Class Discussion Questions

When an organisation anticipates that some customers may not pay their debts, they account for this uncertainty using either the direct write-off method or allowance method.

1. Why might a company choose the allowance method for accounting for bad debts over the direct write-off method?

What are the advantages of using the allowance method?

2. What are the potential consequences of not properly accounting for bad debts on the financial statements?

Homework Questions | Week 4

Problem 11.6: Doubtful Debts

On 1 July 2021, Morton Limited had accounts receivable of $5,000 and an allowance for doubtful debts of $3,100.

During the year ended 30 June 2022, credit sales amounted to $432,500, and cash collected from customers was $417,400.

At the end of the financial year, the credit manager decided that accounts totalling $1,200 should be written off as bad debts and the allowance for doubtful debts increased to $4,200.

Required:

1) What was the estimated collectable value of accounts receivable as at 30 June 2022?

2) What was the amount of the bad debts expense for the year ended 30 June 2022?

3) What are the main reasons for using the allowance method of accounting for bad debts rather than the direct write off method?

Problem 11.9: Income Statement Approach

Smarkly Limited uses the income statement approach to account for bad debts and allowance for doubtful debts. The following information is available:

1. Past experience suggests that 1 per cent of net credit sales will become uncollectable.

2. Credit sales for the year ended 30 June 2022, $3 200 000.

3. Cash sales for the year ended 30 June 2022, $700 000.

4. Bad debts written off during the year ended 30 June 2022, $17 000.

5. Present balance of allowance for doubtful debts account, $21 000.

Required:

Prepare the necessary journal entry or entries to account for bad debts for the year ended 30 June 2022. Show all workings.

Problem 11.10: Balance Sheet Approach

Sprintay Limited uses the balance sheet approach to account for its bad debts expense and allowance for doubtful debts. Past experience indicates the following percentages of accounts receivable that have been written off as bad:

Age category                              Percentage

Not yet due                                1

1-30 days                                   3

31-60 days                                 15

61-90 days                                 35

Over 90 days overdue                  60

Problem 11.10: Balance Sheet Approach

As at 30 June 2022, the ageing of accounts receivable revealed the following:

Age category                               Accounts receivable

Not yet due                                 $85 000

1-30 days                                    $25 000

31-60 days                                  $9 000

61-90 days                                  $5 000

Over 90 days overdue                   $2 000

At present, the allowance for doubtful debts ledger account is as follows:

Age category                        Accounts receivable

Not yet due                           $85 000 

1-30 days                             $25 000

31-60 days                            $9 000 

61-90 days                            $5 000 

Over 90 days overdue             $2 000

Problem 11.10: Balance Sheet Approach

At present, the allowance for doubtful debts ledger account is as follows:

Date                              Details                             Debit                           Credit                     Balance

1 July 2021                    Opening balance                                                                                4 100 CR

15 September 2021        Accounts receivable            1 800                                                        2 300 CR

27 November 2021         Accounts receivable            900                                                           1 400CR

15 March 2022               Accounts receivable           1 200                                                           200 CR

19 June 2022                 Accounts receivable            500                                                           300 DR

Required:

Prepare the necessary journal entry or entries to account for bad debts expense for the year ended 30 June 2022. Show all workings.