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TUTORIAL WEEK 8 Solutions to Tutorial Questions

Textbook Ch. 7 Internal Control and Cash

  Problems P7.17 

Textbook Ch.8 Accounts Receivable & Further Record-Keeping

  Discussion Question 8.7 

  Problems P8.6, P8.18 

  Case 8A* 

 Problem 7.17 – Covington Ltd

Remember that bank reconciliation statements are prepared:

• to explain any differences between the bank balance at the end of the period asshown in the bank statement and in the ledger of the bank’s customer respectively;

• to detect errors in the records of the customer or the bank; and• to enable the cash records of the customer to be brought up to date.

It would be unnecessary to prepare a bank reconciliation statement if all cash transactionswere recorded simultaneously in the accounting records and bank statements.

1

General journals

$ $

Cash 18

Interest revenue 18

Bank charges 11

 Advertising expenses 270

Cash 281

Business School

ACCT1501 Accounting and Financial Management 1A

Session 1 2016 

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Bank reconciliation statement as at 30 September 2016

$

Ending balance as per Bank statement 5,553 CR

Plus 

Outstanding deposit 29 September 630

6,183

Less: 

Unpresented cheques 463 170

479 240

481 345 755

 Adjusted balance 5,428 CR

Ending balance per accounting records 5,691 DR

 Add: Interest received 18

5,709

Deduct: Bank charges 11

 Advertising expenses – error in cheque 486 270 281

 Adjusted balance 5,428 DR

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 DQ 8.7 – Balance sheet approach to calculating the allowance for doubtful debts 

The balance sheet approach involves the use of an ageing analysis to come up with the bestestimate for the ending balance of the allowance for doubtful debts account.

The balance sheet approach is based on the belief that the older the account receivable, thegreater the probability that the amount will not be collected. The important step to remember inthis approach is that the allowance for doubtful debts is a balance sheet account is being adjustedto the required amount at period-end. Whatever the opening balance and what has been allowedalready during the period, an adjustment is needed to bring the account to the closing balanceconsistent with the ageing analysis

The amount of the increase required to move the allowance for doubtful debts to the calculatedageing amount will be the bad debts expense for the period.

Example, the allowance for doubtful debts, calculated based on the aging of account receivableand the probability of collection, is to be $2 900. The opening balance of the allowance fordoubtful debts is $2 500, therefore the allowance needs to increase by $400.

Journal entry

Dr. Bad debts expense 400

Cr Allowance for doubtful debts 400 

T account

Allowance for Doubtful Debts

Opening balance 2,500Closing balance 2,900 Bad debts expense 400

2,900 2,900

The balance sheet approach is superior to the income statement approach because it ensuresthe net balance of accounts receivable is the best estimate of what is likely to be realised orcollected.

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 Problem 8.6 – OJ Ltd  

The journals

a.   Increase the allowance account by $48,000 during the year  

Dr. Bad debts expense 48,000Cr. Allowance for doubtful debts 48,000

b.  Provide or allow for a further $50,000 at year end

Dr. Bad debts expense 50,000Cr. Allowance for doubtful debts 50,000

c. 

Write-off $32,000 of bad debtsDr. Allowance for doubtful debts 32,000

Cr. Accounts receivable 32,000

The T accounts

Bad Debts Expense

a. Allowance for D.D 48,000 P&L Summary 98,000b. Allowance for D.D. 50,000

98,000 98,000

Accounts Receivable

 b/d 425,000 c. Allowance for D.D 32,000c/d 393,000

425,000 425,000

Allowance for Doubtful Debts

c. Accounts receivable 32,000 b/d 22,000*

c/d 88,000 a. Bad debts exp. 48,000b. Bad debts exp 50,000

120,000 120,000

*Note that the balance brought down + $48,000 = $70,000

1  Bad debts expense = $48,000 + $50,000 = $98,000

2  Allowance for doubtful debts = $70,000 + $50,000 - $32,000 = $88,000.

3  Net book value of accounts receivable = $425,000 - $32,000 - $88,000 = $305,000

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 Problem 8.18 – Debtors and creditors control accounts 

Debtors control

2015 $ 2016 $

July 1 Balance b/d 15,425 June 30 Discount expense 725

2016 Cash 61,590

June 30 Sales 101,700 Balance c./d 54,810

117,125 117,125

2016

July 1 Balance b/d 54,810

Creditors control

2016 $ 2015 $

June 30 Cash 45,280 July 1 Balance b/d 9,870

Discount revenue 560 2016

Balance c/d 35,650 June 30 Purchases 71,620

81,490 81,490

2016

July 1 Balance b/d 35,650

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Case 8A* - Woolwortths

1 How were trade debtors valued in the accounts?

Accounts receivable is a financial instrument. The terminology in the accounting standard forfinancial instruments refers to impairment rather than doubtful debts. In effect, it is the sametreatment except there is an allowance for impairment instead of allowance for doubtful debts.

Note 1 to the financial statements (pg 109-110 of annual report)

(J) Financial assets - Trade and other receivables

Trade and other receivables are stated at their cost less any impairment losses (refer Note 1M)

1(M) Impairment(i)  Calculation of recoverable amount

Impairment of receivables is not recognised until objective evidence is available that a loss eventhas occurred. Significant receivables are individually assessed for impairment.

Impairment testing of significant receivables that are not assessed as impaired individually is performed by placing them into portfolios with similar risk profiles and undertaking a collectiveassessment of impairment.

 Non-significant receivables are no individually assessed. Instead, impairment testing is

 performed by placing non-significant receivables in portfolios of similar risk profiles, based onobjective evidence from historical experience adjusted for any effects of conditions at each balance date.

From note 8 to the financial statements (pg 124 of annual report)

2014 2013

Trade receivables $247.6m $234.2m

Trade receivables are presented net of impairment allowance

2014 2013

Impairment allowance $17.8m $14.8m(Allowance for doubtful debts balance)

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2 During the year, how much was written off in bad debts? How do this compare with

the previous year?

Insufficient information is available to answer this question.

We need to know the amount of impairment losses recognised in the income statement for tradereceivables so that we can calculate what has been written off trade receivables.

Allowance

Opening balance 14.8mTrade receivable(written off)

????Impairment expense(in profit/loss)

????

Closing balance 17.8m

 

???? ????

3 What was the journal entry to record bad debts?

Dr Allowance for impairment

Cr Accounts receivable

Journal entry to increase allowance

Dr Impairment expense

Cr Allowance for impairment