Chapters 18 22 Tutorial Solutions PDF

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CHAPTER 18 RECEIVABLES DISCUSSION QUESTIONS 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. EXERCISES Exercise 18.1

Bad debts — direct write-off and allowance methods (excluding GST)

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 2015: Sales Sales returns and allowances Cash collected Debts to be written off

$552 000 37 900 319 120 4 022

Required A. Assume that Centenary Ceramics uses the direct write-off method of accounting for bad debts: 1. Show the general journal entry required to write-off the bad debts. 2. What amount would be shown for bad debts expense in the income statement at 30 June 2015? 3. What amount would be shown for accounts receivable in the balance sheet at 30 June 2015? 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 2014. Also assume that an allowance of 1% of net credit sales is required at 30 June 2015 (ignore GST): 1. Show the general journal entries required to write off the bad debts and bring in the required allowance for doubtful debts. 2. What amount would be shown for bad debts expense in the income statement at 30 June 2015? 3. What amount would be shown for accounts receivable in the balance sheet at 30 June 2015?

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A. 1.

Bad Debts Expense

$4 022

Accounts Receivable – xxx

$4 022

(Bad debts written off using direct write-off method) 2.

Bad Debts Expense $4022 – Income Statement

3.

Accounts Receivable $190 958 – Current Asset Net Sales $552 000 – $37 900 – Cash collected [$319 120] – Bad debts written off [$4022] = $190 958

B. 1.

Allowance for Doubtful Debts

$4 022

Accounts Receivable – xxx (Bad debts written off using allowance method) Bad Debts Expense Allowance for Doubtful Debts

$4 022

5 141 5 141

(Bad debts provided for 1% of net credit sales) 2.

Bad Debts Expense $5141 – Income Statement

3.

Accounts Receivable $191 216 – Current Asset Net Sales [$552 000 – $37 900] – cash collected [$319 120] = Deduct allowance for doubtful debts ($2645 – $4022 + $5141) =

$194 980 $3 764 $191 216

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Exercise 18.2

Bad debts — direct write-off and allowance methods (including GST)

Refer to the information in exercise 18.1. Complete requirements A and B but this time include the impact of a 10% GST. If GST is introduced the information extracted from the accounting records would be: Sales $552 000 Sales Returns & Allowances 37 900 Cash Collected ($319 120 + GST) 351 032 Bad Debts to be written off 4 022 Accounts Receivable written off ($4022 + GST) 4 424 GST Payable ($552 000 – $37 900)  10%51 410 A. 1.

Bad Debts Expense GST Payable (written back) Accounts Receivable – xxx

$4 022 402 $4 424

(Bad debts written off using direct write-off method) 2.

Bad Debts Expense $4022 – Income Statement

3.

Accounts Receivable $210 054 – Current asset Net Sales [$552 000 – $37 900 + GST $51 410] – cash collected [$351 032] – debts written off [4424] = $210 054

1.

Allowance for Doubtful Debts

B. GST Payable (written back) Accounts Receivable – xxx

$4 022 402 $4 424

(Bad debts written off using allowance method) Bad Debts Expense Allowance for Doubtful Debts (Bad debts provided for 1% of net credit sales (excluding GST) 2.

Bad Debts Expense $5141 – Income Statement

3.

Accounts Receivable $206 290 – Current Asset

5 141 5 141

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Net Sales [$552 000 – $37 900 + GST $51 410] – cash collected [$351 032] – debts written off $4424 = Deduct allowance for doubtful debts ($2645 – $4022 + $5141)

$210 054 = 3 764 $206 290

$183 180

PROBLEMS Problem 18.4

Doubtful debts — net credit sales and ageing methods

Great Outdoors Ltd sells outdoor furniture settings on credit. The accounting records at 30 June 2015 reveal the following. Ignore GST. Credit sales (for year) Credit sales returns and allowances (for year) Accounts receivable (balance 30 June 2015) Allowance for doubtful debts (credit balance 30 June 2015)

$1 070 000 90 000 326 500 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: % estimated Balance uncollectable 1 Accounts not yet due $175 600 2 Accounts overdue: 10–30 days 61 000 2 31–60 days 44 000 10 61–120 days 25 400 25 121 days and over 20 500 40 $326 500 Required A. Prepare the journal entries to adjust the Allowance for Doubtful Debts at 30 June 2015 under: 1. the net credit sales method 2. 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 2014. Show the journal entries to record the allowance for doubtful debts at 30 June 2015 under: 1. the net credit sales method 2. 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. 4|P age

A. 2015 1.

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) 2.

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. 1. Allowance for Doubtful Debts 2015 30/6

30/6 $21 100 30/6

Balance c/d

Balance Adjusting

$1 500 19 600

$21 100

$21 100 30/6

Balance b/d

$21 100

2. Allowance for Doubtful Debts 2015 30/6

30/6 Balance c/d

$21 048 30/6

Balance

$1 500

Adjusting

19 548

$21 048

$21 048 30/6

Balance b/d

$21 048

C. 1. June 30

Bad Debts Expense Allowance for Doubtful Debts

$19 600 $19 600

Allowance made on 2% of net credit sales.

2. Bad Debts Expense Allowance for Doubtful Debts

21 898 21 898

Allowance made on ageing of accounts receivable. Required allowance $21 048 + $850

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D. 1. Allowance for Doubtful Debts 30/6

Balance

30/6

Balance c/d

$850 30/6

Adjusting

$19 600

18 750 $19 600

$19 600 Balance b/d

$18 750

2. Allowance for Doubtful Debts 30/6

Balance

30/6

Balance c/d

$850 30/6

Adjusting

21 048 $21 898

$21 898 Balance b/d

E.

$21 898

$21 048

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.

CHAPTER 22 LIABILITIES DISCUSSION QUESTIONS 3. ‘The accounting treatment for a provision and a contingent liability is the same.’ Discuss.

The statement is not true. A provision must be recognised as a liability and reported on the balance sheet. Provisions satisfy the definition of a liability and are defined as liabilities for which only the amount or timing of the future sacrifice of economic resources is uncertain. Nevertheless, they are recognised as liabilities. A contingent liability is a liability but is one that does not satisfy the recognition criteria for a liability because it is not yet probable that a future sacrifice of resources will be required, or the amount cannot be measured reliably. IAS 37/AASB137 states that contingent liabilities are not to be included in the financial statements but should be disclosed as a note to the financial statements. A provision and a contingent liability share a common element — there is the expectation that future sacrifices of economic resources of an entity will be required. They may all be regarded loosely as liabilities. However, there are subtle differences that must be considered when faced with the problem of recognising liabilities. In the past, these terms have been subjected to a variety of interpretations and definitions, and controversy as to whether to recognise, and hence report 6|P age

them, on the balance sheet. IAS37/AASB137 `Provisions, Contingent Liabilities and Contingent Assets’ makes a distinction in these terms. The distinction is made within the conceptual framework, which identifies subtle differences in these terms. EXERCISES Exercise 22.2

Classification of liabilities

Classify each of following items as a contingent liability, a provision or neither.

An unresolved lawsuit against the entity for copyright infringement. Allowance for doubtful debts. An arrangement to pay a bonus to salespersons for achieving sales over $50 000. Refurbishment costs of a machine that will need refurbishment in two years. An agreement to act as guarantor for another firm’s borrowings. Environmental damage that an entity has undertaken to repair. 1 000 12 % debentures issued at $100. A warranty provided at time of purchase that the manufacturer undertakes to repair items that fail within 12 months.

Exercise 22.7

Contingent Liability Neither — adjustment to asset carrying amount. Neither — no present obligation to make the payment. Neither — future cost. Contingent Liability Provision Neither — non current liability. Provision

Warranties

At 30 June 2018, Ting Sun Electronics adjusted its Provision for Warranties so that it would be equal to 5% of sales for the year ended on that date. Sales for the year ended 30 June 2018 were $1 600 000 and the Provision for Warranties before the adjustment was $47 000. On 6 October 2018, a successful claim for warranty on faulty goods to the cost of $900 was made on Ting Sun Electronics. Required A. Prepare the general journal entry at 30 June 2018 to adjust the Provision for Warranties to the required level. B. Record the payment of the warranty claim on 6 October 2018 in general journal format.

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A. 2018 June 30

Warranty Expense Provision for Warranties To provide for warranty expense related to sales made in the year ended 30 June. ($1 600 000  5%) – $47 000 = $33 000

33 000 33 000

B. 2018 Oct. 6

Provision for Warranties Cash at Bank To record warranty costs incurred.

900 900

~THE END~

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