Business School

ACCT1501 Accounting and Financial Management 1A

Session 1 2016

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 as
shown in the bank statement and in the ledger of the banks 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 transactions
were recorded simultaneously in the accounting records and bank statements.

1
General journals
$
Cash

18
Interest revenue

Bank charges
Advertising expenses
Cash

18
11
270
281

2
Bank reconciliation statement as at 30 September 2016

$
Ending balance as per Bank statement
Plus

5,553

Outstanding deposit 29 September

CR

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

Advertising expenses error in cheque 486
Adjusted balance

11
270

281
5,428

DR

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 best
estimate 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, the
greater the probability that the amount will not be collected. The important step to remember in
this approach is that the allowance for doubtful debts is a balance sheet account is being adjusted
to the required amount at period-end. Whatever the opening balance and what has been allowed
already during the period, an adjustment is needed to bring the account to the closing balance
consistent with the ageing analysis
The amount of the increase required to move the allowance for doubtful debts to the calculated
ageing amount will be the bad debts expense for the period.
Example, the allowance for doubtful debts, calculated based on the aging of account receivable
and the probability of collection, is to be $2 900. The opening balance of the allowance for
doubtful 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

Closing balance

Allowance for Doubtful Debts

Opening balance
2,900
Bad debts expense
2,900

2,500
400
2,900

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

Problem 8.6 OJ Ltd

The journals
a. Increase the allowance account by $48,000 during the year
Dr. Bad debts expense
Cr. Allowance for doubtful debts

48,000
48,000

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

Dr. Bad debts expense
Cr. Allowance for doubtful debts

50,000
50,000

c. Write-off $32,000 of bad debts

Dr. Allowance for doubtful debts
Cr. Accounts receivable

32,000
32,000

The T accounts
a. Allowance for D.D
b. Allowance for D.D.

b/d

Bad Debts Expense

48,000
P&L Summary
50,000
98,000

Accounts Receivable
425,000
c. Allowance for D.D
c/d
425,000

Allowance for Doubtful Debts

32,000
b/d
c. Accounts receivable
c/d
88,000
a. Bad debts exp.
b. Bad debts exp
120,000

98,000
98,000

32,000
393,000
425,000

22,000*
48,000
50,000
120,000

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

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

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

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

Problem 8.18 Debtors and creditors control accounts

Debtors control
2015
July

Balance b/d

2016

15,425

June

$
30

2016
June

30

Sales

101,700

Discount expense

725

Cash

61,590

Balance c./d

54,810

117,125

117,125

2016
July

Balance b/d

Creditors control
$
2015

2016
June

54,810

30

Cash
Discount revenue
Balance c/d

45,280

July

560

2016

35,650

June

Balance b/d

9,870

30

Purchases

71,620

81,490

81,490
2016
July

Balance b/d

35,650

Case 8A* - Woolwortths

1 How were trade debtors valued in the accounts?

Accounts receivable is a financial instrument. The terminology in the accounting standard for
financial instruments refers to impairment rather than doubtful debts. In effect, it is the same
treatment 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 event
has 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 collective
assessment 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 on
objective 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

Impairment allowance
(Allowance for doubtful debts balance)

2014
$17.8m

2013
$14.8m

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 trade
receivables so that we can calculate what has been written off trade receivables.
Allowance
Opening balance
Trade receivable
(written off)

????

Closing balance

17.8m

Impairment expense
(in profit/loss)

????

14.8m
????

????

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