UCL2160 – Week 5

FINANCIAL ACCOUNTING
Balance Day Adjustments – Impairment of Trade Receivables

KUSAL RANEPURA
UCL2160 – Week 5

• Whenever an entity sells goods on credit or offers services on credit, it is inevitable that a
certain percentage of accounts receivable will fail to pay their debts.

• Impairment of accounts receivable may arise from various factors, including customer
insolvency, bankruptcy, default, economic downturns, or disputes over goods or services
provided.

• These bad debts will occur despite the efforts of the credit department to screen people before
credit is allowed.

• There are two methods of accounting for Bad Debts

• Direct write off method

• Allowance Method

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UCL2160 – Week 5

Recovery of Bad debts

In some cases, accounts that have been written off may become recoverable
➔ Two-step process to record this:
1. Reinstate the amount of accounts receivables outstanding
2. Record the receipt of cash from the debtor
➔ Bad debts expense is not affected at all

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UCL2160 – Week 5

Journal Entries for BDAs

Date Description Debit $ Credit $

**/** Bad Debts

Direct Write Off Method

Bad Debts expense ***

Accounts Receivable
***
(Write off Accounts Receivables)
**/** Bad Debts
Allowance Method (accrual accounting)

Allowance for doubtful debts ***

Accounts receivable ***

(Write-off as bad debts)

**/** Doubtful debts

Doubtful debts expense **

Allowance for doubtful debts **

(Doubtful Debts of accounts receivables)

**/** Recovering Bad Debts

1.Reinstate the amount outstanding as follows:

Accounts receivable **

Allowance for doubtful debts/ bad debt exp **

(Bad Debt recovered)

2.Record the receipt of cash from the debtor: (recovering Bad

Debts)
Cash **

Accounts receivable **
(Received from A/C Receivables)
(Bad debts expense is not affected at all)

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UCL2160 – Week 5

Q 1 Kogan Pty Ltd sells a limited range of mobile phones. The following details were taken from
its accounts for the year ended 31 Dec 2020, Accounts Receivable contained credit sales
$160,000 with an outstanding balance of $100,000

Additional information: Allowance for Doubtful Debts estimated to be

$3,200

1. Entry for D/D:

2. Impact on IS & SOFP for 31/12/20

Q 2 2% of credit sales of $160,000 for the year ended 31st December 2020 considered as D/Ds

Q 3 Kogan Pty Ltd: Additional Information at 30 June 2022 The entity recovered $3,000 from a
customer ABC previously written off as bad of $5,000. General Journal entry 30 June 2022

1. Entry for Bad Debt Recovered

2. Entry for Received as bad debt recovery

Q 4 Tutu Ltd retails children’s clothing.

Its Trial balance as at 30 June 2020 was as follows

DR CR

Accounts Receivable 2,000,000

Allowance for Doubtful Debts 50,000

Additional Information

 Bad debts to be written off 30 June 2020 $45,000

 The allowance for Doubtful Debts is to be raised to 3 percent of Accounts Receivable at
30 June 2019
Required

(a) Prepare any necessary balance day adjustment general journal entries at 30 June 2020
(b) Show the ledger accounts for Accounts Receivable and Allowance for Doubtful Debts
(c) Prepare the extract of the Income Statement and Balance Sheet

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UCL2160 – Week 5
Q 5 Explain why the Allowance Method is preferred over the Direct Method for Bad Debts

Q 6 The following trial balance is extracted from Acer’s Business

Dr $ Cr $
Motor vehicle 5000
Buildings 10 000
Provision for Depreciation:
Buildings 1000
Motor vehicle 1500
Sales 23592
Purchases 16334
Opening inventory 909
Carriage inwards 808
General expenses 2222
Salaries and wages 1111
Accounts receivable 7500
Accounts payable 8200
Bad debts 111
Cash in hand 1000
Cash at bank 2000
Drawings 222
Capital 12925
Adjustments
 closing inventory $1521
 buildings & MV to be depreciated by 14.52% on cost per annum round off to $1
 Accrued salaries and wages are $500
 prepaid general expenses $22
 cash drawings $200
 goods drawings $100
 bad debts has to written off further by $75

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UCL2160 – Week 5

Q 7 The following trial balance is extracted from Veriton’s Business

Dr $ Cr $
Fixtures and fittings 10 000
Land & Buildings 15 000
Provision for Depreciation:
Fixtures and fittings 2000

Provision for doubtful debts 1500

Sales 25 000
Purchases 15 000
Opening inventory 2000
Lighting and heating 700
General expenses 500
Salaries and wages 1000
Accounts receivable 15 000
Accounts payable 10 000
Cash in hand 250
Cash at bank 250
Capital 21200
Adjustments
 closing inventory $2000
 fixtures and fittings to be depreciated by 10% on cost per annum
 Accrued general expenses are $500
 goods drawings $150
 provision for doubtful debts 20% of closing debtors

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UCL2160 – Week 5

Q8 Little LuLu Ltd retails children’s clothing.

Its Trial balance as at 30 June 2020 was as follows
DR CR
Bank 150,000
Accounts Receivable 4,000,000
Allowance for Doubtful Debts 60,000
Inventory 3,100,000
Prepaid Insurance 120,000
Vehicles 1,500,000
Accumulated Depreciation of Vehicles 300,000
Buildings 15,000,000
Accumulated Depreciation of Building 750,000
Accounts Payable 750,000
Prepaid Rent Revenue 600,000
Mortgage 3,500,000
Capital 15,000,000
Retained Earnings 60,000
Sales 11,000,000
Cost of Goods Sold 4,750,000
Advertising 900,000
Electricity 250,000
Wages 2,250,000
32,020,000 32,020,000
Additional Information

 Insurance was paid 1 April 2020 for 12 months

 Advertising was paid 1 February 2020 for 6 months
 Prepaid Rent revenue for 3 months was received June 1 2020
 Deposits for sales not yet delivered at 30 June 2020 totalled $25,000
 Interest earned by not yet received at 30 June 2020 totalled $5,000
 Wages incurred but not yet paid at 30 June 2020 totalled $150,000
 Vehicles purchased 1 July 2018 are depreciated at 20 percent per annum reducing
balance
 Buildings are depreciated at 5 percent per annum.
 Bad debts written off $80,000
 The allowance for Doubtful Debts is to be raised to 2 percent of Accounts Receivable at
30 June 2020
Required

Prepare any necessary balance day adjustment general journal entries at 30 June 2020

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UCL2160 – Week 5
Q 9 Cheekii Ltd retails children’s clothing.

Its Trial balance as at 30 June 2020 was as follows

DR CR
Bank 600,000
Accounts Receivable 16,000,000
Allowance for Doubtful Debts 350,000
Inventory 12,400,000
Prepaid Insurance 480,000
Vehicles 6,000,000
Accumulated Depreciation of Vehicles 1,200,000
Buildings 60,000,000
Accumulated Depreciation of Building 3,000,000
Accounts Payable 3,000,000
Prepaid Rent Revenue 2,400,000
Mortgage 14,000,000
Capital 60,000,000
Retained Earnings 130,000
Sales 44,000,000
Cost of Goods Sold 19,000,000
Advertising 3,600,000
Electricity 1,000,000
Wages 9,000,000
128,080,000 128,080,000
Additional Information

 Insurance was paid 1 April 2020 for 12 months

 Advertising was paid 1 February 2020 for 6 months
 Prepaid Rent revenue for 3 months was received June 1 2020
 Deposits for sales not yet delivered at 30 June 2020 totalled $100,000
 Interest earned by not yet received at 30 June 2020 totalled $20,000
 Wages incurred but not yet paid at 30 June 2020 totalled $600,000
 Vehicles purchased 1 July 2018 are depreciated at 20 percent per annum reducing
balance
 Buildings are depreciated at 5 percent per annum.
 Bad debts to be written off 30 June 2020 $320,000
 The allowance for Doubtful Debts is to be raised to 3 percent of Accounts Receivable at
30 June 2020
Required

Prepare any necessary balance day adjustment general journal entries at 30 June 2020

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