UNSW Business School

School of Accounting, Auditing & Taxation

Topic 1 – Record Keeping; Accounting Information Systems; Accounts

Receivable

Tutorial Question Answers

Discussion Starter for Tutorial: Additional Question - Afterpay

Trotman, Humphreys, Clout & Morgan 8th edition (THCM):

• Problem 11.6
• Problem 11.12
• Problem 11.15

business.unsw.edu.au
Last Updated 15/3/2021
Guidance: Warning – time is tight in this tutorial. Timing below is an estimate!

Timing Question Detail

10 mins *Introductions
*If you feel you can fit in in – brief recap on Debits and
Credits, journal entries, t accounts

10 mins Q1. Split into groups of 4-5 to discuss

Afterpay This is a warm up question and asking students to consider
real world impact. Students won’t be assessed on it.
Relates to Learning Objectives (LO) 1.2, 1.3, 3.1

15 mins Q2. 11.6 Allowance for doubtful debts LO 3.2 and 3.3
/ 8.7

20 mins Q3. Debtors and Creditors Control accounts LO3.5

11.12 /
8.14

25 mins Q4. Cash receipts and cash payments journal, subsidiary

11.15 / ledgers
8.17 Students given a skeleton outline for the journals
LO 3.4, 3.5, 3.6

Total 80
mins
Q1. Discussion Starter for Tutorial: Afterpay
In the last decade companies which utilise a buy-now pay-later type model, such as Afterpay,
have become increasingly popular. Afterpay is known for its "pay later" service that allows
customers who are either in-store or online to purchase a product immediately, and then repay
that amount in four fortnightly instalments over 6 weeks. While these repayments are interest-
free, late fees are accrued if the repayments are late. Afterpay also charges a fee to the retailer
companies that use its services (a flat fee of 30 cents plus a commission ranging from 4-6%
on all sales made via the platform).
Required:
1. Imagine that Carrington Ltd is a company that sells stand-up desks online. Customers
can purchase desks with cash, or use credit directly from Carrington according to its
credit sales terms. Carrington Ltd has had a policy of allowing the customers who
purchased on credit to repay the amount owing within 60 days from the date of
purchase. It has also utilised an allowance for doubtful debts account in relation to
these credit sales.

On 1 July 2021 Carrington Ltd stops offering its own credit sales terms to customers,
and instead relies exclusively on the services of Afterpay. There is a positive accounts
receivable balance at the beginning of the financial year (01/07/21), related to credit
sales in the previous financial year.
What will be the impact of switching to the use of Afterpay on the income statement
and balance sheet for the year ended 30 June 2022?

Answers not limited to these, just a start for discussion

Income Statement impact:
• Bad Debts Expense no longer recorded. There will no longer be any additional bad
debts recorded because the Allowance for Doubtful Debts account is being closed
off and no further provisions are made during the period.
• There would have to be a journal entry to close the Allowance for Doubtful Debts
account (if it still has a positive balance at the end of the year), and this would
necessitate a credit to an income statement account (possible options would be
“bad debt revenue”, “bad debt expense”, or a miscellaneous expense account e.g.,
Dr Allowance for doubtful debts XX
Cr Bad debt revenue XX (or credit Bad Debt/Miscellaneous/Other Expense)
This is a very unusual situation so it’s not entirely clear what the best account is to credit,
because you would normally never credit an expense account! All you need to keep in
mind is that the credit (whether to a revenue or expense account) will ultimately lead to a
higher profit being recorded, because either it will result in a higher revenue being reported,
or a lower overall expense amount being reported.

• Afterpay retailer fees to Carrington will be recorded. These may be included in

‘Selling Expenses’ or ‘Other Expenses’ on the Income Statement. The section is
dependent on how the company’s income statement is presented.
• Potentially more customers will be prepared to buy from Carrington, and if so there
may be a corresponding revenue (and COGS) increase.
 Balance Sheet impact:
• Accounts Receivable balance will be reduced to zero and closed off. This is
assuming all accounts are collected within the 12 month period.
• Allowance for doubtful debts account will be reduced to zero.
• Potentially higher cash holdings, as the customers who previously would have used
credit terms (i.e., accounts receivable) are now going through Afterpay - Afterpay is
sending the money to the business and then handling the repayments (although
this effect may have evened out over the year). May also be higher to the extent
that more customers go to Carrington because they use Afterpay.

2. The concept behind companies like Afterpay is argued to have existed previously, i.e.,
“what is old, is new again”. In the past many companies have engaged in ‘factoring’
(also known as a type of ‘securitisation’), where the company sells its older aged
accounts receivables to a debt collector. The cash amount received from the debt
collector would be smaller than the official value of the receivable e.g., 70% of the
amount owing from the customer.
What are the similarities and differences in terms of the accounting implications for a
company that uses factoring, compared to a company in partnership with a buy-now-
pay later company, such as Afterpay?

Answers not limited to these, just a start for discussion

Similarities
• Both the sale of the accounts receivable through factoring and using a company
like Afterpay allow the company to reduce accounts receivable and increase cash.
• Both methods result in accounts receivable being ‘off balance sheet’, i.e., does not
appear on the balance sheet.

Differences
• A company using factoring would likely sell its older accounts receivable in
batches. Whereas when using a company like Afterpay there is a continuous
stream of customers who self-select into this payment option.
• When using factoring, the customer accounts receivables being sold by the
business are likely to be those that are highly aged, i.e., more difficult to recover
and not necessarily the accounts that will be paid. This is because the company is
willing to sacrifice a full payment in exchange for any return of cash, e.g., 70% of
the balance, compared to younger more recent accounts receivable which have a
higher probability of being paid. Whereas when using a company like Afterpay it is
simply a stream of customers who are self-selecting this payment and no discount
on cash received. Only a service fee is charged. A business engaging a company
like Afterpay would not know which customers pay within the due date and which
customers have older aged balances (i.e., are at greater risk of default due to
longer time to pay back).
• A company is required to pay a fee on all transactions that are being purchased
using the Afterpay-type company option. The company pays the fee regardless of
the ease of the collection from the customers.
 • The balance sheet does not provide information about the extent to which
transactions involve an Afterpay-type company, whereas a company using
factoring will have some accounts receivable appearing on the balance sheet. This
is because factoring practices are typically about selling the older/aged accounts
receivable that have a lower likelihood of collectability compared to new/younger
accounts receivable.

Q2: Problem 11.6 THCM

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

• This ‘estimated collectable value’ is also known as the ‘net relisable value’.
• Net realisable value A/c Receivable = Closing Balance A/c Receivable - Closing Balance
Allowance for Doubtful Debts
• This net realisable value shows to external users, such as investors, the amount of
accounts receivable the company’s managers believe will be reasonably collected. This
is because allowance for doubtful debts is an estimate of what is uncollectable out of
the associated accounts receivable balance.
• To estimate the net realisable value of A/C Receivable we need to calculate the closing
balances of A/c Receivable and this can be done through preparing the T-account of A/c
Receivable. The closing balance of Allowance for doubtful debts of $4,200 was provided
in the question.
Morton Limited
Ledger accounts
Accounts receivable
01-07-2021 O/B 53 000 30-06-2022 Cash 417 400
30-06-2022 Sales 432 500 30-06-2022 Allowance for 1 200
doubtful debts

30-06-2022 C/B 66 900

Estimated collectable value (30 June 2022) = C/B Ac/ Receivable – C/B Allowance for D.D.
= $66 900 – 4 200
= $62 700
2 What was the amount of the bad debts expense for the year ended 30 June 2022?

There are two ways to estimate bad debts expense for this question: (i) prepare the T-account
for Allowance for doubtful debts and then solve for the missing amount; or (ii) estimate based
on an equation for bad debts expense. Both are shown below.

(i) T-account method:

Allowance for doubtful debts
30-06-2021 A/R 1 200 01-07-2021 O/B 3 100
30-06-2022 Bad debts exp 2 300
30-06-2022 C/B 4 200

(ii) Equation method:

O/B Allowance for D.D. + BD Expense – BD written off = C/B Allowance for D. D.
3 100 + BD Expense – 1 200 = 4 200
Bad Debts Expense = $2 300

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

• To show in the balance sheet for external users of financial statements an estimated
collectable amount (also known as net realisable value) rather than just the closing balance
of accounts receivable (gross receivables). This net realisable value shows to external users,
such as investors, the amount of accounts receivable the company’s managers believe will
be reasonably collected. The closing balance of accounts receivable is not representative of
what the company’s managers expect to collect. This could lead to external users of
financial statements not having relevant information for decision making.
• To conform to the matching principle, whereby the expense (bad debts) is matched to
revenue recognised in the same period. This is in line with a conservative accounting
approach of early recognition of expenses/losses. The use of an Allowance for doubtful debt
account leaves Accounts Receivable unaltered while attempts are still being made to collect
the debt.

Note: most listed companies on the ASX would use the allowance method.
Q3. Problem 11.12 THCM

Debtors’ control
2022 $ 2022 $
Jul 1 O/B 4 850 Jul 31 Cash 9 673
31 Sales (on credit) 8 626
Freight 22 Discount expense 78
outwards

July 31 C/B 3 747

Creditors’ control
2022 $ 2022 $
Jul 31 Cash 6 575 Jul 1 O/B 3 976
Discount 56 Jul 31 Purchases (on credit) 6 945
revenue
Interest expense 25

31/7 C/B 4 315

Note: The Cash sales and Cash Purchases do not appear in the Debtors’ control/Creditors’ control accounts.
Transactions of cash sales and purchases for cash are recorded directly to Cash and the other relevant account.
For example, a cash sale would be recorded with this journal entry (in a general journal):
Dr Cash XX
Cr Sales Revenue XX

Purchases of inventory for cash would be recorded with this journal entry (in a general journal):
Dr Cash XX
Cr Inventory XX
Q4. Problem 11.15 THCM

* One of the confusing things about this question is the different ways the
discounts are described! Please note that students are given a “skeleton” outline for CPJ
and CRJ

Below is how to classify the transactions into the Cash Receipts Journal (CRJ) and Cash
Payments Journal (CPJ). Key words for classification and columns in bold.
Date Transaction Journal Columns
2/6/2022 Paid Venus $6,000 CPJ BANK; A/C PAYABLE
3/6/2022 Milky Way paid an amount of owing of CRJ BANK; DISOUNT ALLOWED;
$1,100, less $30 discount. A/C REC
8/6/2022 Cash sales, $500. CRJ BANK; CASH SALES
10/6/2022 Paid an amount owing to Sun of $4,000, CPJ BANK; DISCOUNT
less $40 discount. RECEIVED; A/C PAYABLE
15/6/2022 Mars paid $7,000 and was allowed $100 CRJ BANK; DSCOUNT
discount. ALLLOWED; A/C REC
16/6/2022 Purchased goods for cash, $3,000. CPJ BANK; CASH PURCHASES
29/6/2022 Constellation paid $8,000, less $200 CRJ BANK; DSCOUNT
discount. ALLLOWED; A/C REC
30/6/2022 Paid Mercury $5,000, discount of $200 CPJ BANK; A/C PAYABLE
was lost.
 Jupiter Ltd
Cash receipts journal
Date Particulars Bank Discount Accounts Cash sales
allowed receivable
DR DR CR CR
$ $ $ $
3/6/2022 Milky Way 1 070 30 1 100
8/6/2022 Cash sales 500 500
15/6/2022 Mars 6 900 100 7 000
29/6/2022 Constellation 7 800 200 8 000
Total 16 270 330 16 100 500

Jupiter Ltd
Cash payments journal
Date Particulars Bank Discount Accounts Cash
received payable purchases
CR CR DR DR
$ $ $ $
2/6/2022 Venus 6 000 6 000
10/6/2022 Sun 3 960 40 4 000
16/6/2022 Cash purchases 3 000 3 000
30/6/2022 Mercury 5 000 5 000
Total 17 960 40 15 000 3 000

Jupiter Ltd
General Ledger

Accounts Receivable Control Accounts Payable Control

$ $ $ $
1/6/22 O/B 27,000 30/6 CRJ 16,100 30/6 CPJ 15,000 1/6/19 O/B 22,000

30/6 C/B 10,900 30/6 C/B 7,000

Discount Allowed Discount Received

$ $ $ $
30/6 CRJ 330 30/6 CPJ 40

Note: The Discount Allowed and Discount Received accounts would be closed off to the
Income Summary (also known as Profit & Loss Summary) in a closing entry for the period.
Both would be included in the Income Statement (this is covered in later weeks)

Cash
$ $
30/6 CRJ 16,270 30/6 CPJ 17,960
Note: In this question we do not have enough information to estimate a closing balance for
the Cash account, i.e. no opening balance provided and no other transaction data. Therefore,
this solution only includes a posting of the CRJ BANK and CPJ BANK columns.

Jupiter Ltd
Accounts Receivable Subsidiary Ledger

Milky Way Mars

$ $ $ $
1/6/22 O/B 3,000 3/6 CRJ 1,100 1/6/22 O/B 14,000 15/6 CRJ 7,000

30/6 C/B 1,900 30/6 C/B 7,000

Constellation
$ $
1/6/22 O/B 10,000 29/6 CRJ 8,000

30/6 C/B 2,000

Schedule – 30/6/22 Accounts receivable

$
Milky Way 1 900
Mars 7 000
Constellation 2 000
10 900
 Accounts Payable Subsidiary Ledger

Venus Mercury
$ $ $ $
2/6/22 CPJ 6,000 30/6 O/B 6,000 30/6 CPJ 5,000 1/6/19 O/B 10,000

30/6 C/B 0 30/6 C/B 5,000

Sun
$ $
10/6 CPJ 4,000 1/6 O/B 6,000

30/6 C/B 2,000

Schedule – 30/6/22 Accounts payable

$
Mercury 5,000
Sun 2,000
Venus 0
7,000

Note: Yellow highlighting indicates that amount has been calculated by solving the T-account.
For the Accounts payable schedule it is optional to include the zero amount for Venus’ account as
this does not affect the total schedule amount.