BAFA Revision Class

Ch.4 Bad debts and allowance for doubtful debts

Prudence Concept:

Bad debts

Bad debts recovered (same period)

Bad debts recovered (of previous periods)

Allowance for doubtful debts (Increase)

Allowance for doubtful debts (Decrease)

Remarks
1. Net Realizable value of T/R =
2. Bad debts were to be write off
3. Bad debts had been written off

Steps in handling question of Allowance for doubtful debts:

Allowance for Doubtful Accounts

$ $
BAFA Revision Class

Exercise
Question 1
During the year ended 31 December 2010, Bruce Ma, a wholesaler, wrote off the following bad
debts:
Terry Mo $5,120 written off on 2 March 2010
Ben Chan $500 written off on 18 May 2010
Grace Wong $1,750 written off on 30 August 2010
Horace Pang $1,200 written off on 3 November 2010

On 28 November 2010, a cheque for $300 was received from Ben Chan in settlement of his account.
His account had been written off as a bad debt during the year. The allowance for doubtful accounts
had a balance of $1,500 as at 1 January 2010. On 31 December 2010, Bruce decided to increase the
allowance for doubtful accounts to 8% of trade receivables. Trade receivables as at that date
amounted to $70,000.

Required:
(a) Draw up the bad debts account and the allowance for doubtful accounts account for the year
ended 31 December 2010. Show the amounts to be transferred to the profit and loss account.
(5.5 marks)
(b) Prepare a statement of financial position extract as at 31 December 2010. (1.5 marks)

Question 2
The following information is extracted from Chan & Co’s statement of financial position as at
31 December 2010:
Trade receivables $6,720,000
Allowance for doubtful accounts $215,000

Required:
(a) Compute the net realisable value of trade receivables as at 31 December 2010. (1 mark)
(b) Given the following information, prepare the journal entries (with narrations) related to bad
debts and allowance for doubtful accounts for the year ended 31 December 2011.(4.5 marks)
(i) Uncollectible debts written off for the year amounted to $111,000.
(ii) An allowance for doubtful accounts of $210,000 was to be made for the year.
BAFA Revision Class
Answer:
Question 1
(a)
Bad Debts
2010 $ 2010 $
Mar 2 Terry Mo 5,120 Nov 28 Ben Chan 300 0.5 0.5
May 18 Ben Chan 500 Dec 31 Profit and loss 8,270 0.5 0.5
Aug 30 Grace Wong 1,750 0.5
Nov 3 Horace Pang 1,200 0.5
8,570 8,570

Allowance for Doubtful Accounts

2010 $ 2010 $
Dec 31 Balance c/f 5,600 Jan 1 Balance b/f 1,500 0.5 0.5
Dec 31 Profit and loss
[($70,000  8%) − $1,500] 4,100 1.5
5,600 5,600

(b)
Bruce Ma
Statement of Financial Position as at 31 December 2010 (extract)
$ $
Current assets:
Trade receivables 70,000 0.5
Less Allowance for doubtful accounts 5,600 64,400 11
($70,000  8%) 1

Question 2
(a) Net realisable value of trade receivables as at 31 December 2010
= $6,720,000 − $215,000 0.5

= $6,505,000 0.5

(b)
The Journal
Date Details Dr Cr
2011 $ $
Dec 31 Bad debts 111,000 0.5
Trade receivables 111,000 0.5
Bad debts written off. 0.5
" 31 Profit and loss 111,000 0.5
Bad debts 111,000 0.5
Transfer of the bad debts balance to the profit and loss account
at the year-end. 0.5
" 31 Allowance for doubtful accounts ($215,000 − $210,000) 5,000 0.5
Profit and loss 5,000 0.5
Transfer of the reduction in allowance for doubtful accounts to
the profit and loss account at the year-end. 0.5