CH-12 Receivables – Accounting : Book Guide

Chapter 12: Receivables Questions and solutions which have a GST version: • Exercise 12.1 • Exercise 12.2 • Exercise 12.3 • Exercise 12.4 • Exercise 12.5 • Exercise 12.6 • Exercise 12.7 • Problem 12.8 • Problem 12.9 • Problem 12.10 • Problem 12.11 • Problem 12.13 • Problem 12.14 Discussion questions 1. Discuss how the Allowance for Doubtful Debts account might have a debit balance before the end-of-period adjustment is made. A debit balance in the Allowance for Doubtful Debts accounts arises when the amount provided for doubtful debts at the end of the previous period is less than the actual bad debts written off in the current period, before making the end-of-period adjustment for doubtful debts in the current period. In other words, the allowance for doubtful debts was underestimated at the end of the previous period. 2. A basic difference between the direct write-off and the allowance method of recording bad debts is that of timing. Explain. The timing of expense recognition is earlier under the allowance method than under the direct method. Under the allowance method, expenses are recognised when an estimate of doubtful debts is made; under the direct method, expense is recognised when a debt turns bad and is written off in the accounts. The allowance method tries to record the expense in the same period in which the sale of goods or provision of services takes place. This method therefore provides better matching of expenses against income/revenues. Under the direct write-off method, bad debts expense is recognised when the debt is written off as bad. If the bad debt is written off in the same accounting period as the sale was made, then correct association of the expense with income/revenues has occurred. If the debt is written off in a period subsequent to the relevant sale, then a mismatch has occurred. 3. ‘The determination of the appropriate amount of the allowance for doubtful debts is a fairly complicated and onerous process. The method of determining the amount of the allowance by using a percentage of net sales is the obvious way to do it.’ Discuss. The percentage of credit sales approach to measurement, if based on past experience and a consideration of current economic conditions, is simple to apply and probably less costly than 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, the ageing of accounts receivable technique is likely to provide a better measure of the collectible amount of receivables as shown on the entity’s balance sheet at the end of the accounting period. 4. A business student was heard to make the following remark: ‘With the advent of credit cards and the existence of factor businesses, it now possible for business entities to offer extensive credit facilities to customers without having to worry about accounting for accounts receivable and all the problems that it brings. Carrying one’s own accounts receivable will become a thing of the past.’ Discuss. The use of credit cards by customers gives the entity the chance to avoid maintaining its own credit facilities. However, credit cards can provide a different opportunity to earn interest on receivables balances from overdue accounts. Consequently, several entities have set up their own private credit card facilities to participate in the opportunity to earn such interest, and to avoid paying fees to established credit card issuers. For an entity to have its own credit card facilities, it must also incur additional costs, such as accounting costs, establishment costs, and collection costs. 5. Jane, a student of accounting, posed the following question: ‘When one looks at the disposal of accounts receivable, there are three different accounting methods for what is essentially the same thing. How can this be? Discuss. Three methods of ‘disposing’ of accounts receivable are (1) factoring, (2) the use of credit cards issued by bank and non-bank institutions, and (3) the use of debit cards under the EFTPOS system. The use of factoring disposes of the accounts receivable actually established by the entity to a collection agency for a fee and hence a cost of disposal. Using credit cards causes the accounts receivable to be passed on at point of sale from the entity to the bank or non-bank financial institution, whose role is to collect the credit card debt. Debit cards avoid the receivable by causing money to be transferred immediately from the customer’s own bank account to the entity’s account. 6. Several months ago, R. James, a trade debtor for $6600, had his account written off as a bad debt. A cheque has just been received in the post from James for $6600 and the assistant accountant made the following journal entry. The assistant accountant asserted that there were more complicated ways of handling such a transaction, but his method is simple and direct. Do you agree? Explain why or why not. It is important, whenever a bad debt is recovered, to debit the Accounts Receivable Control account (and to adjust the subsidiary ledger of R. James), and to credit Bad Debts Recovered, as this will provide a complete history of the debtor’s actions. The GST Payable which had previously been written back, must again be credited. A second entry can then be made to debit Cash at Bank and to credit the Accounts Receivable Control account (as well as the subsidiary account of R. James). This will show that the debtor’s credit rating is better than would appear if the entry in the question was the only one made. 7. ‘Classification of receivables as current or non-current is not that important. The money is received eventually anyway, so what’s the big deal?’ Discuss. Classification of receivables (and payables) as current and non-current is a legal requirement in the balance sheet of companies, and is a practice followed by many other entities as well. What benefits does such a classification bring? Is it an attempt (somewhat crude) to assess the solvency of an entity, to assess its ability to pay its debts when they fall due? Is there a better method of assessing solvency, e.g. amounts due and receivable within three months, six months, nine months, and so on? As an additional issue, discuss as well the classification of receivables and payables into trade and non-trade. What does this classification achieve? 8. ‘Control over receivables is not quite as important as control over cash.’ Discuss. Control over receivables is as important as control over cash. Often in business when we supply goods to our customers we have to wait up to 30 days before we receive a cash payment. This may be after we have paid for the goods we have supplied. It is vital for the survival of a business through adequate cash flow that we collect accounts receivable within the deemed credit period and that we avoid bad debts at all costs. Exercises Exercise 12.1 Bad debts — direct write-off and allowance methods Non-GST version Centenary Ceramics deals in ceramic pots and figurines. All sales are conducted on a credit basis and no cash discounts are given. Ignore GST. The following information was extracted from the accounting records at 30 June 2019. Required (a) Assume that Centenary Ceramics uses the direct write-off method of accounting for bad debts. i. Show the general journal entry required to write-off the bad debts. ii. What amount would be shown for bad debts expense in the income statement at 30 June 2019? iii. What amount would be shown for accounts receivable in the balance sheet at 30 June 2019? (b) Assume that Centenary Ceramics uses the allowance method of accounting for bad debts and the Allowance for Doubtful Debts account had a credit balance of $2645 at 1 July 2018. Also assume that an allowance of 1% of net credit sales is required at 30 June 2019 (ignore GST). i. Show the general journal entries required to write off the bad debts and bring in the required allowance for doubtful debts. ii. What amount would be shown for bad debts expense in the income statement at 30 June 2019? iii. What amount would be shown for accounts receivable in the balance sheet at 30 June 2019? (LO3) (a) i. Bad Debts Expense $4 022 Accounts Receivable – xxx $4 022 (Bad debts written off using direct write-off method) ii. Bad Debts Expense $4022 – Income Statement iii. Accounts Receivable $190 958 – Current Asset Net Sales $552 000 – $37 900 – Cash collected [$319 120] – Bad debts written off [$4022] = $190 958 (b) i. Allowance for Doubtful Debts $4 022 Accounts Receivable – xxx $4 022 (Bad debts written off using allowance method) Bad Debts Expense 5 141 Allowance for Doubtful Debts 5 141 (Bad debts provided for 1% of net credit sales) ii. Bad Debts Expense $5141 – Income Statement iii. Accounts Receivable* 190 958 Less Allowance for Doubtful Debts** 3 764 $187 194 *Accounts Receivable Net Sales – Cash Collected – Debts Written Off ($552 000 – $37 900) – ($319 120) – ($4 022) = $190 958 **Deduct Allowance for Doubtful Debts Op. bal. – Bad Debt Write Off + Bad Debts Expense ($2 645 – $4 022 + $5 141) = $3 764 Exercise 12.1 Bad debts — direct write-off and allowance methods GST version Centenary Ceramics deals in ceramic pots and figurines. All sales are conducted on a credit basis and are GST inclusive. No cash discounts are given. The following information was extracted from the accounting records at 30 June 2019: Sales Sales returns and allowances Cash collected Debts to be written off $607 200 41 690 351 032 4 424 Required (a) Assume that Centenary Ceramics uses the direct write-off method of accounting for bad debts. i. Show the general journal entry required to write-off the bad debts. ii. What amount would be shown for bad debts expense in the income statement at 30 June 2019? iii. What amount would be shown for accounts receivable in the balance sheet at 30 June 2019? (b) Assume that Centenary Ceramics uses the allowance method of accounting for bad debts and the Allowance for Doubtful Debts account had a credit balance of $2645 at 1 July 2018. Also assume that an allowance of 1% of net credit sales is required at 30 June 2019 (ignore GST). i. Show the general journal entries required to write off the bad debts and bring in the required allowance for doubtful debts. ii. What amount would be shown for bad debts expense in the income statement at 30 June 2019? iii. What amount would be shown for accounts receivable in the balance sheet at 30 June 2019? (LO3) (a) i. Bad Debts Expense GST Payable $4 022 402 Accounts Receivable – xxx $4 424 (Bad debts written off using direct write-off method) note: amounts have been rounded down for the amount of GST ii. Bad Debts Expense $4 022 – Income Statement iii. Accounts Receivable $190 958 – Current Asset Net Sales $607 200 – $41 690 – Cash collected [$351 032] – Bad debts written off [$4 42402] = $210 054 (b) i. Allowance for Doubtful Debts GST Payable $4 022 402 Accounts Receivable – xxx $4 424 (Bad debts written off using allowance method) Note: GST has been rounded down Bad Debts Expense 5 141 Allowance for Doubtful Debts 5 141 (Bad debts provided for 1% of net credit sales) Workings: Net credit sales $607 200 – $41 690 = $565 510 / 11 = GST $51 410 Net credit sales excluding GST $514 100 x 0.01% = $5 141 allowance for doubtful debts ii. Bad Debts Expense $5 141 – Income Statement iii. Accounts Receivable* 210 054 Less Allowance for Doubtful Debts** 3 764 $206 290 *Accounts Receivable Net Sales – Cash Collected – Debts Written Off ($607 200 – $41 690) – ($351 032) – ($4 424) = $210 054 **Deduct Allowance for Doubtful Debts Op. bal. – Bad Debt Write Off + Bad Debts Expense ($2 645 – $4 022 + $5 141) = $3 764 Exercise 12.2 Bad debts and financial statement disclosure Non-GST version The following transactions relate to the gardening maintenance business of Steve Jones. The balance in the Allowance for Doubtful Debts account on 1 July 2018 was $7440. The bad debts during the year ended 30 June 2019 amounted to $5220. Debtors’ balances on 30 June 2019 after the bad debts had been written off total $162 960, and a new allowance of 5% of debtors is required. (Ignore GST for the purposes of this exercise.) Required (a) Prepare and balance the Allowance for Doubtful Debts accounts for the year to 30 June 2019. (b) Show how the above information would be disclosed in: i. the income statement for the year ended 30 June 2019. ii. the balance sheet as at 30 June 2019. (LO3) (a) Allowance for Doubtful Debts 2019 2018 30/6 Accounts Receivable $5 220 1/7 Balance $7 440 *Balance c/d 8 148 30/6 Bad Debts Expense 5 928 $13 368 $13 368 2018 * (162 960  5%) 30/6 Balance b/d $8 148 (b) Income Statement for the year ended 30 June 2019 (extract) EXPENSES Bad debts expense $5 928 Balance Sheet as at 30 June 2019 (extract) CURRENT ASSETS Accounts receivable $162 960 Less: Allowance for doubtful debts 8 148 $154 812 Exercise 12.2 Bad debts and financial statement disclosure GST version The following transactions relate to the gardening maintenance business of Steve Jones. The balance in the Allowance for Doubtful Debts account on 1 July 2018 was $7440. The bad debts during the year ended 30 June 2019 amounted to $5742. Debtors’ balances, including GST, on 30 June 2019 after the bad debts had been written off total $179 256, and a new allowance of 5% of debtors is required. Required (a) Prepare and balance the Allowance for Doubtful Debts accounts for the year to 30 June 2019. (b) Show how the above information would be disclosed in: i. the income statement for the year ended 30 June 2019. ii. the balance sheet as at 30 June 2019. (a) Allowance for Doubtful Debts 2019 2018 30/6 Accounts Receivable $5 220 1/7 Balance $7 440 *Balance c/d 8 148 30/6 Bad Debts Expense 5 928 $13 368 $13 368 2019 * ($179 256 – GST $16 297)  5% 30/6 Balance b/d $8 148 (b) Income Statement for the year ended 30 June 2019 (extract) EXPENSES Bad debts expense $5 928 Balance Sheet as at 30 June 2019 (extract) CURRENT ASSETS Accounts receivable $179 256 Less: Allowance for doubtful debts 8 148 $171 108 Exercise 12.3 Doubtful debts — net credit sales method Non-GST version The following transactions relate to the business of Penrith Produce Ltd. Ignore GST. Required (a) Record the transactions in general journal form. (b) What is the balance in the Allowance for Doubtful Debts accounts and the Bad Debts Recovered account? Where are these accounts shown on the financial statements? (LO3) (a) June 30 Bad Debts Expense $3 300 Allowance for Doubtful Debts $3 300 (Estimated bad debts expense) Oct 5 Allowance for Doubtful Debts 550 Accounts Receivable – M. McGrath 550 (Wrote off M. McGrath as uncollectable) Nov 15 Accounts Receivable – M. McGrath 242 Bad Debts Recovered 242 (M. McGrath recovered debt in part) Cash at Bank 242 Accounts Receivable – M. McGrath 242 (Collected part payment in cash) (b) Allowance for Doubtful Debts = Contra current asset — Balance Sheet balance $3300 – $550 = $2750 (shown as a deduction from accounts receivable) Bad Debts Recovered $242 = Income — Income Statement Exercise 12.3 Doubtful debts — net credit sales method GST version The following transactions relate to the business of Penrith Produce Ltd. June 30 Based on past experience, it was estimated that 1% of the year’s net credit sales revenue (GST inclusive) of $363 000 will not be collected, and an allowance for doubtful debts was established. Oct. 5 After a concerted effort to collect, an account receivable of $605 from M. McGrath was written off as a bad debt. Nov. 15 M. McGrath unexpectedly paid $266 of the amount of his debt written off on 5 October. Required (a) Record the transactions in general journal form. (b) What is the balance in the Allowance for Doubtful Debts accounts and the Bad Debts Recovered account? Where are these accounts shown on the financial statements? (LO3) (a) June 30 Bad Debts Expense $3 300 Allowance for Doubtful Debts $3 300 (Estimated bad debts expense) Workings: Net credit sales $363 000 – GST $33 000 = $330 000 x 0.01 Oct 5 Allowance for Doubtful Debts GST Payable 550 55 Accounts Receivable – M. McGrath 605 (Wrote off M. McGrath as uncollectable) Nov 15 Accounts Receivable – M. McGrath GST Payable 266 24 Bad Debts Recovered 242 (M. McGrath recovered debt in part) Cash at Bank 266 Accounts Receivable – M. McGrath 266 (Collected part payment in cash) (b) Allowance for Doubtful Debts = Contra current asset — Balance Sheet balance $3300 – $550 = $2750 (shown as a deduction from accounts receivable) Bad Debts Recovered $242 = Income — Income Statement Exercise 12.4 Doubtful debts — ageing method Non-GST version On 30 June, the end of its financial year, Burnside Consulting completed an age analysis of its accounts receivable and determined that an allowance for doubtful debts of $12 320 was needed in order to report accounts receivable at their estimated collectable amount in the balance sheet. Ignore GST. Required (a) Prepare the entry to record bad debts expense assuming that the Allowance for Doubtful Debts account currently has a $1940 credit balance. (b) Prepare the entry to record bad debts expense assuming that the Allowance for Doubtful Debts account currently has a $820 debit balance. (c) Prepare the entry to write off an account receivable from G. Smith for $781. (d) Assume that before the entry recorded in requirement C above, the net amount of accounts receivable was $99 000. What is the net amount receivable from accounts receivable after recording the write-off of Smith’s account? Explain. (LO3) (a) Bad Debts Expense $10 380 Allowance for Doubtful Debts ($12 320 – $1 940) $10 380 (Increase Allowance for Doubtful Debts to $12 320) (b) Bad Debts Expense $13 140 Allowance for Doubtful Debts $13 140 (Increase Allowance for Doubtful Debts from $820 debit to $12 320 credit) (c) Allowance for Doubtful Debts 781 Accounts Receivable – G. Smith 781 (Write off amount owing by G. Smith) (d) The amount of The amount remains unchanged at $86 680 after considering GST recoverable. The effect of the write off is that it reduces Accounts Receivable and the Allowance for Doubtful Debts by the same amount after adjusting for GST. The net collectible value of accounts receivable remains unchanged as shown below. Before C After C Accounts Receivable $99 000 $98 219 Less: Allowance for Doubtful Debts 12 320 11 539 86 680 86 680 Exercise 12.4 Doubtful debts — ageing method GST version On 30 June, the end of its financial year, Burnside Consulting completed an age analysis of its accounts receivable and determined that an allowance for doubtful debts of $12 320 was needed in order to report accounts receivable at their estimated collectable amount in the balance sheet. (Assume a 10% GST). Required (a) Prepare the entry to record bad debts expense assuming that the Allowance for Doubtful Debts account currently has a $1940 credit balance. (b) Prepare the entry to record bad debts expense assuming that the Allowance for Doubtful Debts account currently has a $820 debit balance. Prepare the entry to write off an account receivable from G. Smith for $859. (c) Prepare the entry to write off the account receivable in C above if the business was not registered to the GST. (d) Assume that before the entry recorded in requirement C above, the net amount of accounts receivable was $99 000 including GST. What is the net amount receivable from accounts receivable after recording the write-off of Smith’s account? Explain. (LO3) (a) Bad Debts Expense $10 380 Allowance for Doubtful Debts ($12 320 – $1940) $10 380 (Increase Allowance for Doubtful Debts to $12 320) (b) Bad Debts Expense $13 140 Allowance for Doubtful Debts $13 140 (Increase Allowance for Doubtful Debts from $820 debit to $12 320 credit) (c) Allowance for Doubtful Debts 781 GST Payable 78 Accounts Receivable – G. Smith 859 (Write off amount owing by G. Smith) Allowance for Doubtful Debts 781 Accounts Receivable – G. Smith 781 (Write off amount owing by G. Smith $859 – GST $78 = $781) (d) The amount remains unchanged at $85 448 after considering GST recoverable. The effect of the write off is that it reduces Accounts Receivable and the Allowance for Doubtful Debts by the same amount after adjusting for GST. The net collectible value of accounts receivable remains unchanged as shown below. Before C After C Accounts Receivable $99 000 $98 141 Less: Allowance for Doubtful Debts 12 320 11 529 86 680 86 602 Less: GST on the Allowance 1 232 1 154 $85 448 $85 448 Exercise 12.5 Doubtful debts — net credit sales method Non-GST version The following details were obtained from the accounting records of Civil Construction Consultants at the end of the financial year. The firm requires an allowance for doubtful debts of 10% of outstanding fees at 30 June. Ignore GST. Required (a) Prepare the appropriate general journal entries. (b) Prepare and balance the Allowance for Doubtful Debts account at 30 June 2019. (c) Show the amount(s) to be charged as bad debts expense for the year. (LO3) (a) June 30 Bad Debts Expense $ 17 000 Allowance for Doubtful Debts $ 17 000 (Allowed for bad debts 10% of fees owing $470 000) Allowance for Doubtful Debts 9 100 Accounts Receivable 9 100 (Wrote off bad debts) (b) Allowance for Doubtful Debts 2019 2019 30/6 Accounts Receivable $9 100 30/6 Balance $30 000 Balance 37 900 30/6 Bad Debts Expense 17 000 $47 000 $4 7 000 1/7 Balance $ 37 900 (c) Bad Debts Expenses — 17 000. Exercise 12.5 Doubtful debts — net credit sales method GST version The following details were obtained from the accounting records of Civil Construction Consultants at the end of the financial year. Consulting fee owing Allowance for doubtful debts Debts to be written off $517 000 30 000 10 010 (includes GST) (Includes GST) The firm requires an allowance for doubtful debts of 10% of outstanding fees at 30 June. Required (a) Prepare the appropriate general journal entries. (b) Prepare and balance the Allowance for Doubtful Debts account at 30 June 2019. (c) Show the amount(s) to be charged as bad debts expense for the year. (LO3) (a) June 30 Bad Debts Expense $ 17 000 Allowance for Doubtful Debts $ 17 000 (Allowed for bad debts 10% of fees owing $517 000 –GST $47 000 = $470 000 x 0.10 = $47,000 – opening balance in Allowance D.Debts $30,000 = $17,000 increase to the Allowance D.Debts account) Allowance for Doubtful Debts GST Payable 9 100 910 Accounts Receivable 10 010 (Wrote off bad debts) (b) Allowance for Doubtful Debts 2019 2019 30/6 Accounts Receivable $9 100 30/6 Balance $30 000 Balance 37 900 30/6 Bad Debts Expense 17 000 $47 000 $4 7 000 1/7 Balance $ 37 900 (c) Bad Debts Expenses — 17 000. Exercise 12.6 Allowance for doubtful debts over 2 years Non-GST version The information in the following table relates to the accounts receivable and allowance for doubtful debts of Prime Moving Ltd. Ignore GST. The company policy is to provide an allowance for doubtful debts at the rate of 3% of accounts receivable at 30 June each year. The balance of the Allowance for Doubtful Debts account on 1 July 2018 was $10 000. Required (a) Determine the missing amounts in the table. (LO3) (a) June 2019 June 2020 Accounts receivable Bad debts written off during the year Required balance of allowance for doubtful debts Increase (decrease) in allowance required Allowance for doubtful debts at 30 June $400 000 12 000 12 000 14 000 12 000 $450 000 15 000 13 500 16 500 13 500 Exercise 12.6 Allowance for doubtful debts over 2 years GST version The information in the following table relates to the accounts receivable and allowance for doubtful debts of Prime Moving Ltd. The company policy is to provide an allowance for doubtful debts at the rate of 3% of accounts receivable at 30 June each year. The balance of the Allowance for Doubtful Debts account on 1 July 2018 was $10 000. June 2019 June 2020 Accounts receivable (GST inclusive) Bad debts written off for past year Required balance of Allowance for Doubtful Debts Increase/decrease in allowance required Allowance for doubtful debts at 30 June $440 000 $13 200 (a) (b) (c) $495 000 $16 500 (d) (e) (f) Required (a) Determine the missing amounts in the table. (LO3) (a) June 2019 June 2020 Accounts receivable Bad debts written off during the year Required balance of allowance for doubtful debts Increase (decrease) in allowance required Allowance for doubtful debts at 30 June $440 000 13 200 12 000 14 000 12 000 $495 000 16 500 13 500 16 500 13 500 Exercise 12.7 Doubtful debts — ageing method over 2 years Non-GST version While accounting for accounts receivable for Easy DVD Ltd, the following information became available to the accountant. At 1 July 2018, the Allowance for Doubtful Debts account balance was $8100. To 30 June 2019, debts amounting to $16 560 were written off as bad, and at 30 June 2019, the required allowance for doubtful debts was calculated under the ageing method to be $9450. To 30 June 2020, debts amounting to $12 690 were written off and at 30 June 2020 the allowance for doubtful debts was calculated under the ageing method to be $10 845. Ignore GST. Required (a) Prepare and balance the Allowance for Doubtful Debts account and the Bad Debts Expense account for years ending 30 June 2019 and 30 June 2020. (b) Prepare the necessary general journal entries to bring the allowance for doubtful debts to the appropriate amount at 30 June 2019 and 30 June 2020. (LO3) (a) Allowance for Doubtful Debts 2019 2018 30/6 Accounts Receivable $16 560 1/7 Balance $8 100 2019 Balance 9 450 30/6 Bad Debts Expense 17 910 $26 010 $26 010 2019 2020 Accounts Receivable 12 690 1/7 Balance 9 450 30/6 2020 Balance 10 845 30/6 Bad debts expense 14 085 $23 535 $23 535 2020 1/7 Balance $10 845 Bad Debts Expense 2019 2019 30/6 Allow. for DD $17 910 30/6 Profit or loss $17 910 2020 2020 30/6 Allow. for DD $10 845 30/6 Profit or loss $10 845 (b) 2019 June 30 Bad Debts Expense 17 910 Allowance for Doubtful Debts 17 910 (Adjustment to increase Allow. for Doubtful Debts to amount calculated) 2020 June 30 Bad Debts Expense 14 085 Allowance for Doubtful Debts 14 085 (Adjustment to increase Allow. for Doubtful Debts to amount calculated) Exercise 12.7 Doubtful debts — ageing method over 2 years GST version While accounting for accounts receivable for Easy DVD Ltd, the following information became available to the accountant. At 1 July 2018, the Allowance for Doubtful Debts account balance was $8100. To 30 June 2019, debts amounting to $18 216 were written off as bad, and at 30 June 2019, the required allowance for doubtful debts was calculated under the ageing method to be $9450. To 30 June 2020, debts amounting to $13 959 were written off and at 30 June 2020 the allowance for doubtful debts was calculated under the ageing method to be $10 845. Transactions are GST Inclusive. Required (a) Prepare and balance the Allowance for Doubtful Debts account and the Bad Debts Expense account for years ending 30 June 2019 and 30 June 2020. (b) Prepare the necessary general journal entries to bring the allowance for doubtful debts to the appropriate amount at 30 June 2019 and 30 June 2020. (LO3) (a) Allowance for Doubtful Debts 2019 2018 30/6 Accounts Receivable $16 560 1/7 Balance $8 100 2019 Balance 9 450 30/6 Bad Debts Expense 17 910 $26 010 $26 010 2019 2020 Accounts Receivable 12 690 1/7 Balance 9 450 30/6 2020 Balance 10 845 30/6 Bad debts expense 14 085 $23 535 $23 535 2020 1/7 Balance $10 845 Bad Debts Expense 2019 2019 30/6 Allow. for DD $17 910 30/6 Profit or loss $17 910 2020 2020 30/6 Allow. for DD $10 845 30/6 Profit or loss $10 845 (b) 2019 June 30 Bad Debts Expense 17 910 Allowance for Doubtful Debts 17 910 (Adjustment to increase Allow. for Doubtful Debts to amount calculated) 2020 June 30 Bad Debts Expense 14 085 Allowance for Doubtful Debts 14 085 (Adjustment to increase Allow. for Doubtful Debts to amount calculated) Problems Problem 12.8 Doubtful debts — percentage of debtors Non-GST version Karen Broderick commenced business on 1 July 2018. On 30 June 2018, she found that she had written off debts amounting to $1875. In addition, she found it necessary to create an allowance for doubtful debts of $3030. During the year to 30 June 2020, debts totalling $2400 proved to be bad and were written off, and $330 was recovered in respect of bad debts previously written off. The total of debtors’ balances at 30 June 2020 was $84 300 (after the bad debts had been written off) and it was decided to increase the allowance for doubtful debts to 5% of this figure. Ignore GST. Required (a) Prepare general journal entries to record all of the transactions. (b) Prepare the Bad Debts Expense account and the Allowance for Doubtful Debts account for 2019 and 2020. (LO3) (a) 2019 June 30 Allowance for Doubtful Debts $1 875 Accounts Receivable $1 875 Write off of bad debt. Bad Debts Expense 4 905 Allowance for Doubtful Debts 4 905 Create allowance for doubtful debts of $3030 ($3030 + $1875). 2020 June 30 Allowance for Doubtful Debts 2 400 Accounts Receivable – xxx 2 400 Write off of debt. Accounts Receivable – xxx 330 Bad Debts Recovered 330 Debts previously written off now recovered. Cash at Bank Accounts Receivable To record the receipt of cash from bad debt recovered 330 330 Bad Debts Expense *3 585 Allowance for Doubtful Debts 3 585 Create balance of Allowance for Doubtful Debts to 5% of $84 300 = $4215. *$4215 – [$3030 – $2400] = $3585 (b) Bad Debts Expense 2019 2019 30/6 Allow. for DD $4 905 30/6 Profit or loss $4 905 $4 905 $4 905 2020 2020 30/6 Allow. for DD $3 585 30/6 Profit or loss $3 585 Allowance for Doubtful Debts 2019 2019 30/6 Accounts Receivable $1 875 30/6 Bad Debts Expense $4 905 Balance c/d 3 030 $4 905 $4 905 2020 2020 30/6 Accounts Receivable 2 400 1/7 Balance b/d 3 030 Balance c/d 4 215 30/6 Bad debts expense 3 585 $6 615 $6 615 2020 1/7 Balance b/d 4 215 Problem 12.8 Doubtful debts — percentage of debtors GST version Karen Broderick commenced business on 1 July 2018. On 30 June 2018, she found that she had written off debts amounting to $2062.50. In addition, she found it necessary to create an allowance for doubtful debts of $3030. During the year to 30 June 2020, debts totalling $2640 proved to be bad and were written off, and $363 was recovered in respect of bad debts previously written off. The total of debtors’ balances at 30 June 2020 was $92 730 (GST Inclusive, this amount is after the bad debts had been written off). It was decided to increase the allowance for doubtful debts to 5% of this figure. Required (a) Prepare general journal entries to record all of the transactions. (b) Prepare the Bad Debts Expense account and the Allowance for Doubtful Debts account for 2019 and 2020. (LO3) (a) 2019 June 30 Allowance for Doubtful Debts GST Payable $1 875 187.50 Accounts Receivable $2062.50 Write off of bad debt. Bad Debts Expense 4 905 Allowance for Doubtful Debts 4 905 Create allowance for doubtful debts of $3030 plus account for bad debts written off amounting to $1875 2020 June 30 Allowance for Doubtful Debts GST Payable 2 400 240 Accounts Receivable – xxx 2 640 Write off of debt. Accounts Receivable – xxx GST Payable 363 33 Bad Debts Recovered 330 Debts previously written off now recovered. Cash at Bank Accounts Receivable – xxxx To record the receipt of cash from bad debt recovered 363 363 Bad Debts Expense *3 585 Allowance for Doubtful Debts 3 585 Create balance of Allowance for Doubtful Debts $92 730 – GST $8 430 = $84 300 x 5% = $4215. *$4215 – [$3030 – $2400] = $3585 (b) Bad Debts Expense 2019 2019 30/6 Allow. for DD $4 905 30/6 Profit or loss $4 905 $4 905 $4 905 2020 2020 30/6 Allow. for DD $3 585 30/6 Profit or loss $3 585 Allowance for Doubtful Debts 2019 2019 30/6 Accounts Receivable $1 875 30/6 Bad Debts Expense $4 905 Balance c/d 3 030 $4 905 $4 905 2020 2020 30/6 Accounts Receivable 2 400 1/7 Balance b/d 3 030 Balance c/d 4 215 30/6 Bad debts expense 3 585 $6 615 $6 615 2020 1/7 Balance b/d 4 215 Problem 12.9 Doubtful debts — ageing method Non-GST version On 1 June, Mason and Boyce had Accounts Receivable and Allowance for Doubtful Debts accounts as below. Ignore GST. During June, the following transactions occurred: 1. Fees earned on credit, $1 195 000. 2. Fees refunded, $24 100. 3. Accounts receivable collected, $1 400 000. 4. Accounts written off as uncollectable, $15 851. Based on an ageing of accounts receivable on 30 June, the firm determined that the Allowance for Doubtful Debts account should have a credit balance of $13 500 on the balance sheet as at 30 June. Ignore GST. Required (a) Prepare general journal entries to record the four transactions and to adjust the Allowance for Doubtful Debts account. (b) Show how accounts receivable and the allowance for doubtful debts would appear on the balance sheet at 30 June. (c) On 29 June, Kim Ltd, whose $2400 account had been written off as uncollectable in June, paid its account in full. Prepare journal entries to record the collection. (LO3) (a) Accounts Receivable $1 195 000 Fees Income $1 195 000 Fees charged in June. Fees Income 24 100 Accounts Receivable 24 100 Refund of fees in June. Cash at Bank 1 400 000 Accounts Receivable 1 400 000 Collections on accounts receivable in June. Allowance for Doubtful Debts 15 851 Accounts Receivable 15 851 Account receivable written off as uncollectable. Bad Debts Expense 17 251 Allowance for Doubtful Debts 17 251 Adjustment to have a closing balance of $13 500 in Allowance for Doubtful Debts. (b) Balance Sheet as at 30 June (extract) Accounts receivable *$604 604 Less: Allowance for doubtful debts 13 500 $591 104 * $849 555 + $1 195 000 – $24 100 – $1 400 000 – $15 851 = $604 604 (c) June 29 Accounts Receivable – Kim Ltd $2 400 Bad Debts Recovered 2 400 Kim Ltd previously written off reinstated as account receivable. Cash at Bank 2 400 Accounts Receivable 2 400 Kim Ltd pays account in full. Problem 12.9 Doubtful debts — ageing method GST version On 1 June, Mason and Boyce had Accounts Receivable and Allowance for Doubtful Debts accounts as below. Accounts Receivable 1/6 Balance 934 510.50 Allowance for Doubtful Debts 1/6 Balance 12 100 During June, the following transactions occurred: 1. Fees earned on credit, $1 314 500. 2. Fees refunded, $26 510. 3. Accounts receivable collected, $1 540 000. 4. Accounts written off as uncollectable, $17 436. Based on an ageing of accounts receivable on 30 June, the firm determined that the Allowance for Doubtful Debts account should have a credit balance of $13 500 on the balance sheet as at 30 June. Required (a) Prepare general journal entries to record the four transactions and to adjust the Allowance for Doubtful Debts account. (b) Show how accounts receivable and the allowance for doubtful debts would appear on the balance sheet at 30 June. (c) On 29 June, Kim Ltd, whose $2640 account had been written off as uncollectable in June, paid its account in full. Prepare journal entries to record the collection. (LO3) (a) Accounts Receivable $1 314 500 Fees Income GST Payable $1 195 000 119 500 Fees charged in June. Fees Income GST Payable 24 100 2 410 Accounts Receivable 26 510 Refund of fees in June. Cash at Bank 1 540 000 Accounts Receivable 1 540 000 Collections on accounts receivable in June. Allowance for Doubtful Debts GST Payable 15 851 1 585 Accounts Receivable 17 436 Account receivable written off as uncollectable. Bad Debts Expense 17 251 Allowance for Doubtful Debts 17 251 Adjustment to have a closing balance of $13 500 in Allowance for Doubtful Debts. (b) Balance Sheet as at 30 June (extract) Accounts receivable *$665 064.50 Less: Allowance for doubtful debts 13 500 $651 564.50 * $934 510.50 + $1 314 500 – $26 510 – $1 540 000 – $15 851 = $665 064.50 (c) June 29 Accounts Receivable – Kim Ltd GST Payable $2 640 240 Bad Debts Recovered 2 400 Kim Ltd previously written off reinstated as account receivable. Cash at Bank 2 640 Accounts Receivable 2 640 Kim Ltd pays account in full. Problem 12.10 Doubtful debts — ageing method Non-GST version On 1 June, McLean, Roberts and Associates had Accounts Receivable and Allowance for Doubtful Debts accounts as set out below. Ignore GST. During June, the following transactions occurred: 1. Fees earned on credit, $1 200 000. 2. Fees refunded, $25 000. 3. Accounts receivable collected, $1 450 000. 4. Accounts written off as uncollectable, $14 740. Based on an ageing of accounts receivable on 30 June, the firm decided that the Allowance for Doubtful Debts account should have a credit balance of $13 000 on the balance sheet as at 30 June. Required (a) Prepare general journal entries to record the four transactions and to adjust the Allowance for Doubtful Debts account. (b) Show how accounts receivable and the allowance for doubtful debts would appear on the balance sheet at 30 June. (c) On 29 July, Blundell Ltd, whose $1870 account had been written off as uncollectable in June, paid its account in full. Prepare general journal entries to record the collection. (LO3) (a) Accounts Receivable $1 200 000 Fees Income $1 200 000 Fees charged in May. Fees Income 25 000 Accounts Receivable 25 000 Refund of fees in May. Cash at Bank 1 450 000 Accounts Receivable 1 450 000 Collections on accounts receivable in May. Allowance for Doubtful Debts 14 740 Accounts Receivable 14 740 Account receivable written off as uncollectible. Bad Debts Expense 15 490 Allowance for Doubtful Debts 15 490 Adjustment to have a closing balance of $13 000 in Allowance for Doubtful Debts.($12 250 – $14 740 = –$2490 + $15 490 to set allowance to $13 000) (b) Balance Sheet as at 30 June (extract) Accounts receivable *$557 260 Less: Allowance for doubtful debts 13 000 $544 260 * $847 000 + $1 200 000 – $25 000 – $1 450 000 – $14 740 = $557 260 (c) July 29 Accounts Receivable – Blundell Ltd $1 870 Bad Debts Recovered 1 870 Blundell Ltd previously written off reinstated as account receivable. Cash at Bank 1 870 Accounts Receivable 1 870 Blundell Ltd pays account in full. Problem 12.10 Doubtful debts — ageing method GST version On 1 June, McLean, Roberts and Associates had Accounts Receivable and Allowance for Doubtful Debts accounts as set out below. Accounts Receivable 1/6 Balance 931 700 Allowance for Doubtful Debts 1/6 Balance 12 250 During June, the following transactions occurred: 1. Fees earned on credit, $1 320 000. 2. Fees refunded, $27 500. 3. Accounts receivable collected, $1 595 000. 4. Accounts written off as uncollectable, $16 214. Based on an ageing of accounts receivable on 30 June, the firm decided that the Allowance for Doubtful Debts account should have a credit balance of $13 000 on the balance sheet as at 30 June. Required (a) Prepare general journal entries to record the four transactions and to adjust the Allowance for Doubtful Debts account. (b) Show how accounts receivable and the allowance for doubtful debts would appear on the balance sheet at 30 June. (c) On 29 July, Blundell Ltd, whose $2057 account had been written off as uncollectable in June, paid its account in full. Prepare general journal entries to record the collection. (LO3) (a) Accounts Receivable $1 320 000 Fees Income GST Payable $1 200 000 120 000 Fees charged in May. Fees Income GST Payable 25 000 2 500 Accounts Receivable 27 500 Refund of fees in May. Cash at Bank 1 595 000 Accounts Receivable 1 595 000 Collections on accounts receivable in May. Allowance for Doubtful Debts GST Payable 14 740 1 474 Accounts Receivable 16 214 Account receivable written off as uncollectible. Bad Debts Expense 15 490 Allowance for Doubtful Debts 15 490 Adjustment to have a closing balance of $13 000 in Allowance for Doubtful Debts.($12 250 – $14 740 = –$2490 + $15 490 to set allowance to $13 000) (b) Balance Sheet as at 30 June (extract) Accounts receivable *$612 986 Less: Allowance for doubtful debts 13 000 $599 986 * $931 700 + $1 320 000 – $27 500 – $1 595 000 – $16 214 = $612 986 (c) July 29 Accounts Receivable – Blundell Ltd GST Payable $2 057 187 Bad Debts Recovered 1 870 Blundell Ltd previously written off reinstated as account receivable. Cash at Bank 2 057 Accounts Receivable 2 057 Blundell Ltd pays account in full. Problem 12.11 Doubtful debts — net credit sales and ageing methods Non-GST version Great Outdoors Ltd sells outdoor furniture settings on credit. The accounting records at 30 June 2019 reveal the following. Ignore GST. In the past, the company’s yearly bad debts expense had been estimated at 2% of net credit sales revenue. It was decided to compare the current method with an ageing of the accounts receivable method. The following analysis was obtained with respect to the accounts receivable. Required (a) Prepare the journal entries to adjust the Allowance for Doubtful Debts at 30 June 2019 under: i. the net credit sales method ii. the ageing of accounts receivable method. (b) Determine the balance in the Allowance for Doubtful Debts account under both methods. (c) Assume that the allowance account had a debit balance of $850 at 30 June 2018. Show the journal entries to record the allowance for doubtful debts at 30 June 2019 under: i. the net credit sales method ii. the ageing of accounts receivable method. (d) Using the journal entries from requirement C, determine the balance in the allowance account under both methods. (e) Explain, with reference to requirements B and D, why the two different methods result in different balances. (LO3) (a) 2019 i. June 30 Bad Debts Expense $19 600 Allowance for Doubtful Debts $19 600 Allowance made on 2% of net credit sales ($1 070 000 – $90 000) ii. June 30 Bad Debts Expense 19 548 Allowance for Doubtful Debts 19 548 Allowance made on ageing of accounts receivable. Required allowance is $21 048 – $1500 = $19 548 (b) i. Allowance for Doubtful Debts 2018 30/6 Balance $1 500 30/6 Balance c/d $21 100 30/6 Adjusting 19 600 $21 100 $21 100 30/6 Balance b/d $21 100 ii. Allowance for Doubtful Debts 2018 30/6 Balance $1 500 30/6 Balance c/d $21 048 30/6 Adjusting 19 548 $21 048 $21 048 30/6 Balance b/d $21 048 (c) i. June 30 Bad Debts Expense $19 600 Allowance for Doubtful Debts $19 600 Allowance made on 2% of net credit sales. ii. Bad Debts Expense 21 898 Allowance for Doubtful Debts 21 898 Allowance made on ageing of accounts receivable. Required allowance $21 048 + $850 (d) i. Allowance for Doubtful Debts 30/6 Balance $850 30/6 Adjusting $19 600 30/6 Balance c/d 18 750 $19 600 $19 600 30/6 Balance b/d $18 750 ii. Allowance for Doubtful Debts 30/6 Balance $850 30/6 Adjusting $21 898 30/6 Balance c/d 21 048 $21 898 $21 898 30/6 Balance b/d $21 048 (e) The net credit sales method and the ageing of accounts receivable method both calculate a 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 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 entry for Bad Debts Expense is calculated by taking into account any opening balance in the allowance account to achieve the desired ending balance. Since the two methods involve 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. Problem 12.11 Doubtful debts — net credit sales and ageing methods GST version Great Outdoors Ltd sells outdoor furniture settings on credit. The accounting records at 30 June 2019 reveal the following. Note: 10% GST Inclusive Credit sales (for year) Credit sales returns and allowances (for year) Accounts receivable (balance 30 June 2019) Allowance for doubtful debts (credit balance 30 June 2019) $1 177 000 99 000 359 150 1 500 In the past, the company’s yearly bad debts expense had been estimated at 2% of net credit sales revenue. It was decided to compare the current method with an ageing of the accounts receivable method. The following analysis was obtained with respect to the accounts receivable: Balance % estimated uncollectable Accounts not yet due Accounts overdue: 10–30 days 31–60 days 61–120 days 121 days and over $193 160 67 100 48 400 27 940 22 550 2 10 25 40 $359 150 Required (a) Prepare the journal entries to adjust the Allowance for Doubtful Debts at 30 June 2019 under: i. the net credit sales method ii. the ageing of accounts receivable method. (b) Determine the balance in the Allowance for Doubtful Debts account under both methods. (c) Assume that the allowance account had a debit balance of $850 at 30 June 2018. Show the journal entries to record the allowance for doubtful debts at 30 June 2019 under: i. the net credit sales method ii. the ageing of accounts receivable method. (d) Using the journal entries from requirement C, determine the balance in the allowance account under both methods. (e) Explain, with reference to requirements B and D, why the two different methods result in different balances. (LO3) (a) 2019 i. June 30 Bad Debts Expense $19 600 Allowance for Doubtful Debts $19 600 Allowance made on 2% of net credit sales ($1 177 000 – $99 000) = 1 078 000 – GST 98 000 = 980 000 x 2% ii. June 30 Bad Debts Expense 19 548 Allowance for Doubtful Debts 19 548 Allowance made on ageing of accounts receivable. Required allowance is $21 048 – $1500 = $19 548 (b) i. Allowance for Doubtful Debts 2018 30/6 Balance $1 500 30/6 Balance c/d $21 100 30/6 Adjusting 19 600 $21 100 $21 100 30/6 Balance b/d $21 100 ii. Allowance for Doubtful Debts 2018 30/6 Balance $1 500 30/6 Balance c/d $21 048 30/6 Adjusting 19 548 $21 048 $21 048 30/6 Balance b/d $21 048 (c) i. June 30 Bad Debts Expense $19 600 Allowance for Doubtful Debts $19 600 Allowance made on 2% of net credit sales. ii. Bad Debts Expense 21 898 Allowance for Doubtful Debts 21 898 Allowance made on ageing of accounts receivable. Required allowance $21 048 + $850 (d) i. Allowance for Doubtful Debts 30/6 Balance $850 30/6 Adjusting $19 600 30/6 Balance c/d 18 750 $19 600 $19 600 30/6 Balance b/d $18 750 ii. Allowance for Doubtful Debts 30/6 Balance $850 30/6 Adjusting $21 898 30/6 Balance c/d 21 048 $21 898 $21 898 30/6 Balance b/d $21 048 (e) The net credit sales method and the ageing of accounts receivable method both calculate a 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 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 entry for Bad Debts Expense is calculated by taking into account any opening balance in the allowance account to achieve the desired ending balance. Since the two methods involve 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. Problem 12.12 Accounts receivable and bills receivable Cathy Smythe, who trades as Cathy’s Corner, uses the following journals in her business: general, cash receipts, cash payments, sales and purchases. The control account for the accounts receivable in the general ledger at 1 June 2019 (with posting references omitted) is summarised below. Accounts Receivable Control 2019 1/6 21/6 30/6 116 380 7 458 132 000 2019 18/6 26/6 30/6 748 7 458 104 236 Set out below are the only two subsidiary ledger accounts for receivables affected by general journal entries during June: Required (a) State the posting references for the entries on 30 June in the Accounts Receivable Control account. (b) How could the credit balance in the account of Jones have arisen? (c) Determine what the total of the schedule of accounts receivable should be on 30 June. (d) What transactions would have led to the debit in the account of Lyons on 22 June? (e) Explain the transactions that would have led to the credit entries in the Accounts Receivable Control account on 9, 18 and 26 June. (LO2) (a) Accounts Receivable Control 2019 2019 1/6 Balance $116 380 18/6 GJ7 748 21/6 CPJ8 7 458 26/6 GJ7 7 458 30/6 SJ5 132 000 30/6 CRJ6 104 236 30/6 Balance c/d 143 396 $255 838 $255 838 30/6 Balance b/d $143 396 (b) The credit balance of $748 could have arisen because Jones made an overpayment on his account. He may have had a sales return on goods but had also made payment on the original amount invoiced. (c) Total for the schedule of accounts receivable on 30 June 2019 should be $143 396. (d) The debit to the Lyons account on 22 June could have arisen through incorrectly recording a cash payment to a trade creditor as a debit to Lyons’s account. (e) The credit to the Accounts Receivable Control Account on 9 June would be Lyons’s payment for the amount owing. The general journal entry on 18 June would have been a sales return by Jones. The general journal entry on 26 June to Lyons’s account would have been a correcting entry to adjust for the debit error on 21 June. Problem 12.13 Doubtful debts — net credit sales and ageing methods Non-GST version All transactions below relate to Biancardi Construction Ltd’s uncollectable accounts for the financial year ended 30 June 2019. Ignore GST The Accounts Receivable account had a balance at 30 June 2019 of $189 200, and the beginning (1 July 2018) balance in the Allowance for Doubtful Debts account was $9300. Required (a) Prepare journal entries for each of the transactions. (b) Determine: i. the balance in the Allowance for Doubtful Debts account after the 30 June adjustment ii. the expected realisable value of the accounts receivable as at 30 June. (c) Assume that instead of basing the allowance for doubtful debts on net credit sales, the estimate of uncollectable accounts is based on an ageing of accounts receivable and that $11 630 of the accounts receivable as at 30 June was estimated to be uncollectable. Determine: i. the general journal entry to bring the allowance account to the desired balance ii. the expected realisable value of the accounts receivable as at 30 June. (LO3) (a) July 18 Allowance for Doubtful Debts $572 Accounts Receivable – F. Forrest $572 To write off bad debt. Oct. 19 Accounts Receivable – K. Mears 1650 Bad Debts Recovered 1 650 To record bad debt recovered. Oct. 19 Cash at Bank 1 650 Accounts Receivable – K. Mears 1 650 To record cash received from debtor. Jan. 31 Cash at Bank 352 Allowance for Doubtful Debts 528 Accounts Receivable – B. Blanck 880 To record amount received, and write off remainder as a bad debt. Feb. 16 Allowance for Doubtful Debts 6 050 Accounts Receivable – Denis Co. Ltd 2 530 Accounts Receivable – H. Howard 3 520 To write off bad debts. Mar. 20 Cash at Bank 396 Allowance for Doubtful Debts 1 188 Accounts Receivable – JB Plumbers 1 584 To record amount received and write off remainder as a bad debt. Apr. 16 Accounts Receivable – G. Digby 1 067 Bad Debts Recovered 1 067 To record bad debt recovered. Apr. 16 Cash at Bank 1 067 Accounts Receivable – G. Digby 1 067 To record cash received from debtor. June 30 Bad Debts Expense 9 465 Allowance for Doubtful Debts 9 465 End-of-period adjustment. (b) i. Balance in the allowance account after 30 June adjustment: Beginning balance $9 300 Less: Debits to the account during the year 8 338 Add: Credits to the account during the year — End-of-period adjustment 9 465 Ending balance $10 427 ii. Expected realisable value of accounts receivable: 30 June balance of accounts receivable $189 200 Less: Allowance for doubtful debts 10 427 Expected realisable value $178 773 (c) i. Adjustment necessary at 30 June: Balance in allowance account before 30 June adjustment Cr ($9300 – $8 338) 962 Desired end-of-period balance Cr 11 630 Adjustment needed $10 668 June 30 Bad Debts Expense $10 668 Allowance for Doubtful Debts $10 668 ii. Expected realisable value of accounts receivable: 30 June balance of accounts receivable $189 200 Less: Allowance for doubtful debts 11 630 Expected realisable value $177 570 Problem 12.13 Doubtful debts — net credit sales and ageing methods GST version All transactions below relate to Biancardi Construction Ltd’s uncollectable accounts for the financial year ended 30 June 2019. Note: GST Inclusive. July 18 Wrote off the $629.20 account of F. Forrest as uncollectable. Oct. 19 Re-established the account of K. Mears and recorded the collection of $1815 in full payment of his account, which had been written off previously. Jan. 31 Received 40% of the $968 balance owed by B. Blanck and wrote off the remainder as uncollectable. Feb. 16 Wrote off as bad the accounts of Denis Co. Ltd, $2783, and H. Howard, $3872. March 20 Received 25% of the $1742.40 owed by JB Plumbers and wrote off the remainder as a bad debt. April 16 Received $1173.70 from G. Digby in full payment of his account, which had been written off earlier as uncollectable. June 30 Estimated bad debts expense for the year to be 1.5% of net credit sales of $694 100. The Accounts Receivable account had a balance at 30 June 2019 of $208 120, and the beginning (1 July 2018) balance in the Allowance for Doubtful Debts account was $9300. Required (a) Prepare journal entries for each of the transactions. (b) Determine: i. the balance in the Allowance for Doubtful Debts account after the 30 June adjustment ii. the expected realisable value of the accounts receivable as at 30 June. (c) Assume that instead of basing the allowance for doubtful debts on net credit sales, the estimate of uncollectable accounts is based on an ageing of accounts receivable and that $11 630 of the accounts receivable as at 30 June was estimated to be uncollectable. Determine: i. the general journal entry to bring the allowance account to the desired balance ii. the expected realisable value of the accounts receivable as at 30 June. (LO3) (a) July 18 Allowance for Doubtful Debts $572.00 GST Payable 57.20 Accounts Receivable – F. Forrest $629.20 To write off bad debt. Oct. 19 Accounts Receivable – K. Mears 1 815.00 Bad Debts Recovered 1 650.00 GST Payable 165.00 To record bad debt recovered. Oct. 19 Cash at Bank 1 815 .00 Accounts Receivable – K. Mears 1 815.00 To record cash received from debtor. Jan. 31 Cash at Bank 387.20 Allowance for Doubtful Debts 528.00 GST Payable 52.80 Accounts Receivable – B. Blanck 968.00 To record amount received, and write off remainder as a bad debt. Feb. 16 Allowance for Doubtful Debts 6 050.00 GST Payable 605.00 Accounts Receivable – Denis Co. Ltd 2 783.00 Accounts Receivable – H. Howard 3 872.00 To write off bad debts. Mar. 20 Cash at Bank 435.60 Allowance for Doubtful Debts 1 188.00 GST Payable 118.80 Accounts Receivable – JB Plumbers 1 742.40 To record amount received and write off remainder as a bad debt. Apr. 16 Accounts Receivable – G. Digby 1 173.70 Bad Debts Recovered 1 067.00 GST Payable 106.70 To record bad debt recovered. Apr. 16 Cash at Bank 1 173.70 Accounts Receivable – G. Digby 1 173.70 To record cash received from debtor. June 30 Bad Debts Expense 9 465 Allowance for Doubtful Debts 9 465 End-of-period adjustment. (b) i. Balance in the allowance account after 30 June adjustment: Beginning balance $9 300 Less: Debits to the account during the year 8 338 Add: Credits to the account during the year — End-of-period adjustment 9 465 Ending balance $10 427 ii. Expected realisable value of accounts receivable: 30 June balance of accounts receivable $189 200 Less: Allowance for doubtful debts 10 427 Expected realisable value $178 773 (c) i. Adjustment necessary at 30 June: Balance in allowance account before 30 June adjustment Cr ($9300 – $8338) $962 Desired end-of-period balance Cr 11 630 Adjustment needed $10 668 June 30 Bad Debts Expense $10 668 Allowance for Doubtful Debts $10 668 ii. Expected realisable value of accounts receivable: 30 June balance of accounts receivable $208 120 Less: Allowance for doubtful debts 11 630 Expected realisable value (note includes GST) $196 490 Problem 12.14 Ageing of accounts receivable and adjustment of allowance Non-GST version The accountant for Debbie’s Dance Ltd prepared an ageing analysis of accounts receivable balances at 30 June 2019 as set out below. The percentages of each age group are based on past experience and are shown next to the aged balances. Ignore GST. The allowance method is used to account for bad debts. On 30 June 2019 the credit balance of the Allowance for Doubtful Debts account is $3150 before any adjustments. Required (a) Prepare the general journal adjusting entry for estimated bad debts on 30 June 2019. (b) Give the entry to write off the account of S. Riley in August 2019, $1650. (LO3) (a) June 30 Bad Debts Expense $16 897.50 Allowance for Doubtful Debts $16 897.50 Record allowance for doubtful debts. Sales % $346 500  0.5% $1 732.50 99 000  2.0% 1 980.00 24 750  10% 2 475.00 29 700  20% 5 940.00 19 800  40% 7 920.00 $20 047.50 Less: Balance 3 150.00 $16 897.50 (b) 2019 Sept. Allowance for Doubtful Debts $1 650 Accounts Receivable – S. Riley $1 650 Write off account. Problem 12.14 Ageing of accounts receivable and adjustment of allowance GST version The accountant for Debbie’s Dance Ltd prepared an ageing analysis of accounts receivable balances at 30 June 2019 as set out below. The percentages of each age group are based on past experience and are shown next to the aged balances. The company is registered for GST. The allowance method is used to account for bad debts. On 30 June 2019 the credit balance of the Allowance for Doubtful Debts account is $3150 before any adjustments. Age Estimated uncollectable (%) Balance Current 30–60 days overdue 61–120 days overdue 121 days to 6 months overdue Over 6 months overdue 0.5 2.0 10 20 40 $381 150 108 900 27 225 32 670 21 780 $571 725 Required (a) Prepare the general journal adjusting entry for estimated bad debts on 30 June 2019. (b) Give the entry to write off the account of S. Riley in August 2019, $1815. (LO3) (a) June 30 Bad Debts Expense $16 897.50 Allowance for Doubtful Debts $16 897.50 Record allowance for doubtful debts. Note: Since the allowance and bad debts expense excludes GST, the balances used in the ageing process would need to be exclusive of GST. Sales Sales (ex GST) $381 150 $346 500  0.5% $1 732.50 108 900 99 000  2.0% 1 980.00 27 225 24 750  10% 2 475.00 32 670 29 700  20% 5 940.00 21 780 19 800  40% 7 920.00 $20 047.50 Less: Balance 3 150.00 $16 897.50 (b) 2018 Sept. Allowance for Doubtful Debts $1 650 GST Payable 165 Accounts Receivable – S. Riley $1 815 Write off account. Problem 12.15 Use of credit cards Barrett’s Boots Ltd has traditionally made sales for cash and on credit only. Management has resisted accepting credit cards on the basis that the business would lose on average a credit card fee of 4% of the sale value, adversely affecting already low profit margins. Management has become concerned at negative customer reaction to the policy of not accepting credit cards and, indeed, suspects that sales are being lost because of this policy. Management has asked you to provide a table showing credit and collection costs in dollars and as a percentage of net sales associated with credit sales and maintaining accounts receivable. The following data have been provided for the two most recent years which are expected to be representative of future operations. Other collection and credit expenses expressed as percentages of net sales are: It is also estimated that the average accounts receivable balance during the year is approximately 6% of net credit sales, and that surplus cash can be invested at 14% p.a. It is also known that credit card companies pay on average 96% of the sale within 4 business days of the date of sale. Required (a) Prepare a table setting out for each year all of the credit and collection expenses both in dollars and as a percentage of net sales. (b) Estimate, as a percentage of net credit sales, the cost of the interest forgone in carrying accounts receivable. (Ignore the 4-day gap for the purpose of calculation). (c) Explain how credit cards are a means of disposing of accounts receivable. (LO4) (a) Credit and Collection Systems 2019 2020 % of % of $ net sales $ net sales Accounts receivable clerk 4 350 0.6040 4 350 0.725 Collection agency fees 3 250 0.4514 3 200 0.533 Bad debts 10 800 1.500 9 000 1.500 Invoicing /marketing 4 320 0.6000 3 600 0.600 Credit evaluation 1 008 0.1400 840 0.140 $23 728 3.2954 $20 990 3.498 (b) Interest Foregone 2019 2020 Average accounts receivable (6% of net sales) $43 200 $36 000 Amount that could be invested if credit cards were used *$41 472 **$34 560 Interest at 14% p.a. $5 806 $4 838 * $43 200  (100% – 4% c/charge) ** $36 000  (100% – 4% c/charge) (c) When customers pay for goods and/or services with a credit card, there is no need for the business to set up account receivable accounts for each customer. The business is transferring the amount owing by the customer to the credit card issuer, who will regard the customer as an account receivable. Instead of having the customer owe money to the business, the business regards the credit card issuer as a receivable. The credit card issuer will eventually pay the business for the transaction less the credit card fee. The business only deals with credit card issuers as receivables and does not need to keep records of individual customers, a task assumed by the credit card issuers. Problem 12.16 Monitoring cash collection The following information has been extracted from the annual reports of Lilydale Ltd and Monbulk Ltd. Required (a) Calculate the receivables turnover ratio and average collection period for both companies. Comment on the difference in their collection experiences. (b) Compare the success or otherwise of their cash collection policies, given that the average receivables turnover for the industry in which the companies operated is 7. Credit terms for both companies are 2/10, n/30. (LO4) (a) Lilydale Ltd Monbulk Ltd Receivables turnover ratio: Net credit sales revenue Average receivables $2 950 300 ($722 650 + $485 800)/2 $2 204 300 ($368 000 + $ 384 200)/2 = 4.88 times = 5.86 times Average collection period: 365 days Receivables turnover ratio = 75 days = 62 days Lilydale Ltd on average makes a credit sale, bills the customer and collects the amount owing in full 4.88 times per year. The average number of days it takes to collect payment resulting from a credit sale is 75 days. Monbulk Ltd bills and collects on its credit sales on average 5.86 times per year. It takes an average of 62 days to collect amounts owing on accounts receivable. These results are better than for Lilydale Ltd as they are collecting amounts owing more quickly. (b) In comparing the industry average to the performance of both companies, they both should improve their credit collection performance. They both have underperformed compared to the industry average of 7, which indicates accounts are collected within 52 days of billing. Both companies are exceeding their credit policy limit of 30 days by a significant amount. Problem 12.17 Monitoring cash collection The information on the next page has been extracted from the financial statements of Crystal Craft Ltd. Required (a) Calculate the following for years 2020 and 2021: i. the receivables turnover ratio ii. average collection period of accounts receivable. (b) Based on the ratios calculated in requirement A, comment on the credit collection policies of the company. What additional information would make an analysis of cash collection policies more meaningful? (LO4) (a) 2020 2021 Receivables turnover ratio: Net credit sales revenue Average receivables $1 120 000 ($102 000 + $108 000)/2 $1 130 000 ($108 000 + $124 000)/2 = 10.67 times = 9.74 times Average collection period = 34 days = 37days (b) The 2020 and 2021 ratios indicate a relaxation of credit collection policy. In 2020 receivables turned over or were paid in full 10.67 times a year compared to 9.74 times in 2021. The position has worsened between 2020 and 2021. 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 2020 to 37 days in 2021. If the credit policy allows for payment in 30 days it appears, on average, debtors were paying within a reasonable time period in 2020, but this has worsened in 2021. 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. Case studies Decision analysis Credit cards or not? Felicity’s Flowers Pty Ltd has been operating profitably for a number of years and has always sold merchandise on the basis of cash or credit. Felicity, the proprietor, had always resisted accepting credit cards as payment, as she has always had a dislike for them as a result of family upbringing where she was constantly reminded of the dangers of using personal credit cards. Although profits of the business have been satisfactory, they are declining, and it is becoming clear that sales are being lost because credit card facilities are not available to potential customers. Major competitors have been accepting credit cards for many years and appear to have an expanding customer base. Felicity is also mindful of the costs that are associated with offering credit card facilities. Daniel Wiseman, an accountant and personal friend, recently pointed out to Felicity that selling goods on credit also incurred considerable costs which were often overlooked. Examples of such costs include credit assessment of potential customers, invoicing and record keeping, bad debts, and credit collection costs. He pointed out that offering credit card facilities in some cases could be more financially attractive than selling on credit. He volunteered to prepare data to enable a comparative analysis to be made of the costs of selling on credit and carrying accounts receivable and the costs of accepting credit cards. After analysing the past 3 years of accounting records, Daniel produced the following figures based on a 3-year average of recorded results. Other direct financial costs identified and expressed as a percentage of credit sales were as follows. Daniel also established that credit card issuers impose, on average, a charge of 4% of credit sales and the cash is received approximately 5 days from the date of sale. The average monthly accounts receivable balance is $40 000, and any surplus cash arising from the use of credit cards (ignoring the 5 day delay period) can be invested at 7% p.a. Required (a) Prepare a table setting out the average credit/collection costs both in total dollars and as a percentage of net credit sales. (b) Prepare a table to show the cost of interest earnings forgone as a result of not being able to invest money which would become available if credit cards were introduced. (c) Prepare a table setting out the total cost in dollars and as a percentage of credit sales and of credit and collection costs of carrying accounts receivable. (d) Based on the analyses above, would you recommend that Felicity’s Flowers Pty Ltd offers credit card facilities to its customers rather than selling on credit? Would your recommendation be the same if non-financial factors were considered? Explain. (a) Credit and Collection Systems % of $ av. net sales Accounts receivable clerk 19 000 1.407 Collection agency costs 8 000 0.593 Invoicing /collection costs 7 290 0.540 Credit assessment 1 350 0.100 Bad debts 16 875 1.250 $52 515 3.89 (b) Interest Foregone Amount that could be invested if credit cards were used *$38 400 Interest at 7% p.a. $2 688 * $40 000  (100% – 4% c/charge) (c) Total Cost of Credit and Collection Policy % of $ net sales Expenses (see A) $52 515 3.890 Interest foregone (see B) $2 688 0.199 Total $55 203 4.089 (d) As can be seen from the above analysis, the current cost of the credit and collection policy now being used is only very marginally exceeds 4%, the current charge made for credit cards. While the cost is only marginally above the credit card charge, non-financial factors such as the possible loss of custom through the non-acceptance of credit cards, and the loss of goodwill which occurs when collection agencies have to follow up slow-paying customers, the analysis would suggest that Felicity’s Flowers Pty Ltd should adopt the use of credit cards. The use of credit cards is so widespread in today’s commercial environment that any business not offering such a credit facility would be disadvantaged as the loss of custom would quickly offset any perceived excessive costs of credit card facilities. The company would suffer no significant effects if it were to offer both a credit and credit card options to customers. Critical thinking Methods of calculating doubtful debts Two members of the management staff of Practical Products Ltd were debating the merits of the percentage of net credit sales method and the ageing of debtors method for determining the allowance for doubtful debts at year-end. Lance held the view that ‘during times of economic stability when credit sales and receivables do not fluctuate, the percentage of net sales method is to be preferred due to its simplicity of calculation’. He did concede that perhaps the ageing method could be better during periods when the business was experiencing rapid growth in credit sales. Phillip, on the other hand, argued that ‘the ageing method was the better choice in all economic conditions whether credit sales and receivables were steady, rising, or falling’, and maintained that simplicity of calculation should not be the basis for selecting a particular method. Required (a) Do you agree with Lance that the percentage of net credit sales method should be preferred because of its simplicity of calculation? Explain why or why not. (b) Why do you think that Lance concedes that the ageing method might be better in times when credit sales and receivables are increasing? Explain. (c) Is there any validity in Phillip’s argument that the ageing method would be better in all economic conditions (stable/increasing/decreasing credit sales)? Explain your stance. (d) Does the fact the percentage of net credit sales method is referred to as the income statement method and the ageing of receivables as the balance sheet method have any relevance in the discussion between Lance and Phillip? (a) Discussion should centre around the fact that in an accounting system which has not computerised its accounts receivable, the percentage of net credit sales method would be simple to calculate. Performing an ageing analysis of a large number of receivables would certainly be laborious both in developing the expected bad debts percentages and in performance an analysis based on the developed percentages. Even in a system where a spreadsheet is used to maintain receivables the percentage of net sales method is still simpler and less time consuming. In a computerised accounting system, while the calculations are still more complex, the computer is able to perform an age analysis on request The choice between the two methods then becomes one of accuracy of calculation and conceptual correctness. (b) Lance recognises that when credit sales and receivables are increasing, the Allowance for Doubtful Debts account balance will keep increasing, and result in the balance potentially becoming quite large over time. This arises because the bad debts written off increasingly fall short of the amount provided. This problem can only be overcome if there is increasing levels of bad debts resulting from receivables — in other words the write offs rise to match the allowance provided. Economically this is undesirable. (c) Phillip’s argument is valid in that the allowance under ageing is determined by calculating expected bad debts using past collection experience. The actual bad debts are matched again this estimate in each accounting period and any balance remaining is taken into account when determining the end of period allowance. This process does not depend on the trends in credit sales or receivables. It can be argued that it better aligns bad debts expense with revenue generated from credit sales over time is achieved, it could be argued. (d) Conceptually, the percentage of net credit sales in a period emphasises the bad debts expense which is reported in the income statement — the expense is matched against the credit sales revenue of the same accounting period. The reported amount in the balance sheet is not considered even though there is the problem of an increasing balance in the Allowance and hence a lower reported receivable amount. The ageing method emphasises reporting the amount of receivables expected to be collected, as it is based on an analysis of the receivables and the component estimated not to be collected. Both methods affect the income statement and the balance sheet, hence the description of the methods as ‘income’ or ‘balance’ is relevant and ties in closely with the discussion in A, B, and C. Communication and leadership Monitoring cash collections Divide into groups and, under the guidance of a group leader, compare and contrast the credit policies and methods of monitoring cash collections appropriate for the following types of businesses: 1. a large hotel serving liquor and meals, together with the provision of motel-style accommodation to the travelling public 2. a relatively large manufacturer of leisure footwear, supplying shoes to a large number of small independent footwear retailers operating mainly through large suburban shopping centres. There are a number of similar manufacturers supplying footwear in a very competitive market. Required (a) After discussion as outlined, each group should develop a written plan in order for managing the receivables appropriate for each of the businesses. (a) Credit policies and methods of monitoring cash collections could be as follows. 1. For a hotel most of the liquor and meals will be provided for cash or on credit card and so credit policy is not necessary. Most of the accommodation will be provided on credit card facilities and so again this should not be a problem for a motel. Regular customers that use the motel can establish an account and in this case it will be necessary to do a credit check before setting up the account, and adopt a credit policy. 2 The manufacturer of leisure footwear is likely to have more credit issues than the hotel. As this is a competitive market there will be more pressure on the manufacturer to get new customers before it has time to properly check their credit references. It may also have customers who are only just beginning their retail business and therefore have little or no credit history. However, all potential customers should have a credit check run on them before their account is established. In terms of cash collections it will be important for the manufacturer to maintain an aged accounts receivable record and to make sure that accounts are collected as soon as possible and deliveries stopped to customers who do not pay within a reasonable period. Receivables credit and collections policies should be constantly monitored. Ethics and governance Blenheim Instruments Ltd and bad debts Jenny Pike, assistant accountant for Blenheim Instruments Ltd, was finalising the balance sheet of the company as at 30 June 2019 with the accountant of the business, Russell Bayer. Although both agreed that everything appeared to be in order, Jenny had noticed that a large loan had been taken out by the company with ABB Bank and that, as part of the loan agreement, Blenheim Instruments Ltd was to maintain a ratio of current assets (less inventories) to current liabilities of at least 1.25:1. She was concerned that the company would not be able to maintain this ratio given the fact that she had just learned that two of the company’s largest customers had gone into liquidation and there was every likelihood that the company would recover no more than 10% of the debts owing. The current allowance for doubtful debts was grossly inadequate and thus the accounts receivable was overstated. The relevant figures prepared for the balance sheet showed current assets (less inventories) standing at $1 250 000, and current liabilities stood at $1 000 000. Jenny raised her concerns with Russell Bayer about the overstatement of accounts receivable and not being able to maintain the desired minimum ratio for the purpose of the loan agreement, if the accounts receivable figure was updated. Russell replied: ‘Yes, I can appreciate your concerns. However, we don’t know how much will be recovered from the liquidated companies, so let’s leave things the way they are. The bank wants only the 30 June figures and, as it is, the ratio will be okay as far as the bank is concerned.’ Russell thought about the problem a little further and then explained: ‘We won’t have to write off the additional bad debts until next year when they occur and are known with certainty, and by then things will have picked up. I am sure the directors of the company will agree with me, and be happy to leave the accounts as they are, so there is no need for you to worry anymore.’ Required (a) Identify the stakeholders involved in this situation. (b) What are the main ethical issues involved? (c) What actions are available to Jenny to resolve the dilemma she faces? (d) What would you do if you were Jenny? (a) Stakeholders are Jenny Pike (assistant accountant), Russell Bayer (Accountant), ABB Bank, the company Blenheim Instruments Ltd and its shareholders. Jenny, as an assistant accountant, could suffer consequences by not agreeing with her immediate superior. If she agrees and the largest customers go into liquidation, she must suffer the consequences of not disclosing the company’s inability to maintain current assets to current liabilities ratio. She also compromises her personal and professional integrity. Russell could suffer as a result of senior management’s concern that its accountant has not monitored this developing problem in the important current ratio. The bank will be deceived by the proposed action and is exposed to additional risk on lending to this company. The shareholders of Blenheim Instruments Ltd are exposed to the risk of company liquidation through non-payment from customers and the bank calling on immediate payment of any loans outstanding. (b) The failure to maintain the current ratio at the agreed level should be disclosed to the bank as per the loan agreement. The deliberate non-disclosure despite knowledge of the liquidation of the largest customer is fraudulent. Russell Bayer must disclose this information to the directors of Blenheim Instruments Ltd and notify ABB Bank of the failure to meet the current ratio specifications. Blenheim Instruments Ltd must take appropriate action with respect to the net realisable value of their accounts receivable and the bank needs to be notified of the failure to meet the current ratio specifications. Russell Bayer must act in accordance with the ethical guidelines for professional accountants and Jenny Pike should not be a party to fraudulent action. (c) (i) Jenny can comply with the suggestion made by Russell Bayer and not adjust the realisable net value of accounts receivable. (ii) Jenny can refuse to comply with Russell Bayer and suffer the consequences. (iii) Jenny can approach Russell and suggest that they both not compromise their personal and professional ethical standards, adjust the net realisable value of accounts receivable, and suggest that management approach the bank with an explanation of the situation. The bank may then reappraise the current ratio restriction and re-evaluate the loan with Blenheim Instruments Ltd. Jenny can also emphasise the adverse consequences of the subsequent discovery of the non-disclosure on her, Russell, bank relations, the entity’s reputation. (d) It appears that option (iii) is the most desirable action. Financial analysis Wesfarmers Ltd Refer to the latest financial report of Wesfarmers Ltd on its web site: www.wesfarmers.com.au and answer the following questions using the consolidated balance sheet and notes to the consolidated financial statements. 1. Have the receivables (current) of Wesfarmers Ltd increased or decreased over the year? By how much? Is the figure at the end of the year gross or net receivables? What was the balance of the allowance (provision) for doubtful debts (allowance for impairment of receivables) on the same date? What classes of receivables are recorded under the classification Receivables (current)? How is the GST in the receivables reported? 2. Compare current assets and current liabilities as shown on the balance sheet and comment on the short-term solvency of the company. 3. What items of receivables are included under the classification Other Assets (current)? Does Wesfarmers Ltd allow for doubtful debts on any of these receivables? 4. What is the major type of receivables (non-current) held by Wesfarmers Ltd at the end of the year? 5. What was the amount of bad debts actually written off during the financial year? How does this compare with the previous year? Please noted: responses are based on 2016 annual report. 1. Receivables (current trade receivables) have increased by $165m ($1628m – 1463m). The year-end receivables figure is shown as a net value, representing the fair value of the trade receivables less the allowance for doubtful debts (credit loss). The allowance for doubtful debts (credit losses) in 2016 amounted to $64m for current trade receivables, this was an increase of $6m on the 2015 allowance. The types of receivables are recorded as ‘receivables (current) are: trade and other, and finance advances and loans (see note 5, pp. 99 & 100). Note, allowance for doubtful debts is not recorded for “other” debtors because it is expected that the balances will be received when due. GST is included in the balance of trade and other debtors where GST is included in the sales made or services performed. 2. For 2016, current assets were $9684m, while current liabilities were $10424m. The current ratio is therefore 0.929: 1 ($9684/$10424). Using the traditional ‘rule of thumb’ for this ratio, 0.929 is low and would inadequate liquidity as there is only than 92 cents of current assets for every $1 of current liabilities. 3. The receivables classified as “other debtors” represent transactions outside the usual operating activities of the group. These receivables represent $404m. There are no doubtful debts or credit losses recorded for these receivables because Wesfarmers believe they will receive full payment by the due date. 4. According to the 2016 Annual report, Wesfarmers does not have any receivables recorded under the non-current asset category. 5. From note 5 (p. 99), the receivables written off in 2016 amounted to $8m, which is lower than the $10m written off in 2015. Solution Manual for Accounting John Hoggett, John Medlin, Claire Beattie, Keryn Chalmers, Andreas Hellmann, Jodie Maxfield 9780730344568