FADM 2022-23

Tutorial # 3 problems
1. Allowance for Bad Debts

The following pertains to credit sales by XYZ during the years of 2011 and 2012:

2011 2012

Credit Sales 40,000 70,000

=÷
Cash from customers 28,000 78,000
Bad Debt Written Off 1,000 5,000
Opening A/R
Opening Allowance for Bad Debts
20,000
2,000
=

Show relevant ledger accounts for XYZ for 2011 and 2012 under the assumption that
XYZ provides (1) provision for Bad Debts as 5% of credit sales during the period and (2)
allowance for bad debts as 10% of closing A/R balance.

What is the amount of bad debt expense charged to the profit and loss statement and the
allowance for bad debt on the balance sheet each year? What are you views of the
adequacy of the allowance being created by the company?

Solution

Accounts receivable
2011 opening balance 20,000 Cash collected from 28,000
customers
Credit sales during the year 40,000 Bad debt written off 1,000
2011 ending balance 31,000
[20,000+40,000-28,000-
1,000]

2012 opening balance 31,000 Cash collected from 78,000

customers
Credit sales during the year 70,000 Bad debt written off 5,000
2012 ending balance 18,000
[31,000+70,000-78,000-
5,000]
 Provision for Bad Debts calculated as 5% of credit sales
during the period
Allowance for bad debt
Bad debt written off 1,000 2011 opening balance 2,000
Bad debt expense 2,000
[40,000*5%]
2011 ending balance 3,000
[2,000 + 2,000 – 1,000]

Bad debt written off 5,000 2012 opening balance 3,000

Bad debt expense 3,500
[70,000*5%]
2012 ending balance 1,500
[3,000 + 3,500 – 5,000]

Provision for Bad Debts calculated as 10% of closing A/R

balance.
Allowance for bad debt
Bad debt written off 1,000 2011 opening balance 2,000
Bad debt expense [PLUG] 2,100
[3,100 + 1,000 – 2,000]
2011 ending balance 3,100
[31,000*10%]

Bad debt written off 5,000 2012 opening balance 3,100

Bad debt expense [PLUG 3,700
[1,800 + 5,000 – 3,100]
2012 ending balance 1,800
[18,000*10%]

Allowance as 5% of Allowance as 10% of closing

sales AR
Income Statement
Bad debt expense
2011 2,000 2,100
2012 3,500 3,700
 Balance sheet
2011
Gross AR 31,000 31,000
Less : allowance 3,000 3,100
Net AR 28,000 27,900

2012
Gross AR 18,000 18,000
Less : allowance 1,500 1,800
Net AR 16,500 16,200

sbii-P-7ii-wu.ua?e-otaIT?i
→ opbal ✗✗

+
sales xx

e) bad debts
written ( xx )
off

f) cash rec'd (xx )

Gross AR

step 2 for bad debts

Prov

→ ✗ ✗

1+1 CY
prox as a -1
ofsales ✗ ✗ → its
-

written (xx )
e) bad debts off
 el bal → Bls
(subtract
from gross
AR )

Provasatof
step 1- No
change .

steps bad
op of prov ✗ ×

written cxx )
1-7 bad debts off
? Ils
f) provision ( plug )
-

ex

Bls
el bat
-

ofprov (i.
of Ar
(subtract
step 1) Gross AR from
from gross
step I * t .

AR)
Back calculate the
plug .