Accounting Irrecoverable Debts. 30/06/2021/ Wednesday Homework. Resource Pack Questions, Question # 1
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taiba sajjadAccounting Irrecoverable Debts. 30/06/2021/ Wednesday Homework. Resource Pack Questions, Question # 1
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taiba sajjadACCOUNTING
Irrecoverable Debts.
30/06/2021/ Wednesday
Homework.
Resource Pack Questions,
Question # 1.
Adil is a wholesaler. All his sales are made on credit terms. His financial year
ends on 31 August.
REQUIRED
(a) State the meaning of each of the following terms.
Irrecoverable debts: An amount owing to a business that will not be paid by
credit customers.
Irrecoverable debts recovered: Money received from credit customers in
payment of debts after they have been written off as irrecoverable debts.
Provision for doubtful debts: An estimate of the amount which a business
will lose in a financial year because of irrecoverable debts.
On 31 August 2018 Adil received a cheque for $0.20 in a dollar from Mahinda, a
credit customer. The balance of the account was irrecoverable.
REQUIRED
(b) Record this information in the following accounts in Adil’s ledger.
Close the accounts on 31 August 2018 by balancing or by making a transfer to
an appropriate account.
Some entries have already been made in the accounts during the year.
Adil
Mahida Account.
Date Detail $ Date Detail $
Feb Sales 600 Feb Sales Returns 30
1 10
31 Bank 114
Aug
Balance c/d 456
Total/ Bad debts 600 Total/ Bad debts 600
Bad debts account
Date Detail $ Date Detail $
2018 Total to date 710 2018 Income Statement 1166
Aug, Aug.
30 31
31. Mahinda 456
Total 1166 Total 1166
Adil is proposing to stop selling on credit and to sell on cash terms only.
REQUIRED
(c)
(i) State one possible advantage to Adil of going ahead with this proposal.
Removes the possibility of irrecoverable debts.
(ii) State one possible disadvantage to Adil of going ahead with this proposal.
Customers may move to other suppliers.
(d) Suggest two ways (apart from stopping selling on credit) in which Adil could
reduce the risk of bad debts.
1. Stop further supplies until the last payment gets cleared.
2. Charge huge interest on late payments.
Adil has maintained a provision for doubtful debts for many years. He provided
the following information.
$
Trade receivables on 31 August 2017 44200
Trade receivables on 31 August 2018 (after writing off Mahinda’s account) 42000
On 31 August 2018 Adil decided to reduce the rate of the provision for doubtful
debts from 3% to 2½%.
REQUIRED
(e) Prepare the provision for doubtful debts account for the year ended 31 August
2018. Balance the account and bring down the balance on 1 September 2018.
Provision for doubtful debts
Date Detail $ Date Detail $
2018, Income Statement 276 2017, Balance c/d 1326
Aug31 Sep 01
Balance c/d 1050
Total 1326 Total 1326
2018, Balance b/d 1050
Sep 01
(f) Explain how Adil is applying the accruals (matching) principle by maintaining a
provision for doubtful debts.
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(g) Name two other accounting principles which Adil is applying to maintain a
provision for doubtful debts.
1. Prudence concept.
2. Consistency concept.
On 20 September 2018 Adil received a cheque for $250 from Amaya whose
account had been written off in 2017.
REQUIRED
(h) State how this was recorded in Adil’s books of account.
Debit credit
Bank Irrecoverable debt recovered
(i) State how this transaction would affect the profit for the year ending 31 August
2019.
Profit will increase by $250.
