and takes into account the established relationship between length that an account is

HI5001 ACCOUNTING FOR BUSINESS DECISIONS outstanding and the increased likelihood that it will not be collected. It is also more consistent
Tutorial Topic 8 with the conceptual framework, focusing on valuation of assets.
Receivables
5. The two main ways of determining the allowance for doubtful debts are sometimes referred to
as the ‘balance sheet’ and the ‘income statement’ approach. To which method does each term
Reading: Hoggett & Edwards Chapter Eighteen refer, why and which would be more appropriate under the IASB’s Conceptual Framework?
Questions: Hoggett & Edwards Chapter 18
Discussion Questions: 1, 2, 3 & 5 • The ageing of accounts receivable method is based on the accounts receivable in the
Exercises: 18.6, 18.8 & 18.9 statement of financial position (balance sheet) at the end of the period. Being based on the
Problems: 18.5, 18.7, 18.8, 18.9 & 18.10
actual accounts receivable outstanding at that point in time the figure calculated determines
Critical Thinking Case
the figure that should be presented in the balance sheet as the allowance for doubtful debts,
Ethical Issues
DISCUSSION and the expense flows from the required adjustment. It can be argued this is more consistent
QUESTIONS with the conceptual framework as the change in asset determines the expense.
SOLUTIONS
1. Compare and contrast accounts receivable and bills receivable • The percentage of credit sales method is based on the sales made during the year. This figure
is obviously found in the income statement. The calculation ‘matches’ the doubtful debts
Accounts Receivable are specifically those accounts that arise from the sale of goods and expense to the sales revenue they generated. That expense is then added to the outstanding
services on credit in the ordinary course of business. They are less proscriptive than bills
allowance to calculate a new balance for the contra-asset. This is an older conceptual
receivable and don’t require formal acceptance, charge no interest and specify terms on which
payment is expected to be made. approach which could be argued to no longer be theoretically correct.

Bills receivable are a much more formal legal document used for extending credit in a range
of circumstances. Bills receivable have four essential features. They must be an unconditional
order, made in writing, involving three parties and include a specific payment date.
Exercise 18.6 Doubtful debts – ageing method
2. ‘Having accounts receivable means by definition that there will be bad debts; therefore it
makes no sense for an organisation to extend credit.’ Discuss.
SANYAM – SOLICITOR
The organisation must consider the cost of extending credit against the benefits to be gained.
The costs certainly include the risk of bad debts, along with record keeping and control. Also Required :
the lost earnings while waiting to receive the money from a sale that would otherwise have A. Prepare the appropriate general journal entries.
been for cash should be considered. This needs to be balanced against the benefit of increased B. Prepare and balance the Allowance for Doubtful Debts account at 30 June 2013.
sales (or forgone lost sales) due to customers choosing to transact based on the credit terms. C. Show the amount(s) to be charged as bad debts expense for the year.
The decision of whether to extend credit or not will depend largely on the industry the
organisation operates in, the expectations of customers and actions of competitors.
A.

3. ‘Determining the amount of the allowance for doubtful debts by simply using a percentage of
net sales is the obvious way to do it — the alternatives are complicated and onerous.’ June 30 Bad Debts Expense $10 600
Discuss. Allowance for Doubtful Debts $10 600

The percentage of credit sales approach to measurement, if based on past experience and a (Required Allowance is $23 500 – Opening
consideration of current economic conditions, is simple to apply and probably less costly than Allowance $21 500 + Bad Debts $8 600)
the ageing of accounts receivable technique. It could be argued as well that the percentage of
sales approach gives a better association of the expense against income/revenue. However, Allowance for Doubtful Debts 8 600
the ageing of accounts receivable technique is likely to provide a better measure of the
Accounts Receivable 8 600
collectible amount of receivables as shown on the entity’s balance sheet at the end of the
accounting period. As it focuses on the source of bad debts, outstanding accounts receivable (Wrote off bad debts)

Exercise 18.9 Doubtful Debts – Ageing Method Over 2 Years

B. GAMES GALORE LTD

Allowance for Doubtful Debts
Required:
2013 2012 A. Prepare and balance the Allowance for Doubtful Debts account and the Bad Debts Expense
30/6 Accounts Receivable $8 600 1/7 Balance $21 500 account for years ending 30 June 2013 and 30 June 2014.
2013 B. Prepare the necessary general journal entries to bring the allowance for doubtful debts to
Balance 23 500 30/6 Bad Debts Expense 10 600 the appropriate amount at 30 June 2013 and 30 June 2014.
$32 100 $32 100
1/7 Balance $23 500 A.

Allowance for Doubtful Debts

2013 2012
C. Bad Debts Expenses - $10 600 30/6 Accounts Receivable $33 120 1/7 Balance $16 200
2013
Balance 25 000 30/6 Bad Debts Expense 41 920
Exercise 18.8 Allowance for Doubtful Debts Over 2 Years
$58 120 $58 120
2013
EASY-CREDIT LTD 2014 Accounts Receivable 23 380 1/7 Balance 25 000
Required: June 30 2014
Determine the missing amounts in the table in the text. Balance 21 690 30/6 Bad debts expense 20 070
$45 070 $45 070
June June
2014
2013 2014
1/7 Balance $21 690

Accounts receivable $300 000 $320 000 Bad Debts Expense

2013 2013
Bad debts written off during the year 8 000 10 000
30/6 Allow. for DD $41 920 30/6 Profit and loss $41 920
Required balance of allowance for doubtful debts 9 000 9 600
2014 2014
Increase (decrease) in allowance required 7 000 10 600 30/6 Allow. for DD $20 070 30/6 Profit and loss $20 070

Allowance for doubtful debts at 30 June 9 000 9 600

B.

2013
30 June Bad Debts Expense 41 920
Allowance for Doubtful Debts 41 920
 (Adjustment to increase Allow for Doubtful Debts B.
to amount calculated)
1.
2014
30 June Bad Debts Expense 20 070 Allowance for Doubtful Debts
Allowance for Doubtful Debts 20 070 30/6 Balance $1 500
(Adjustment to increase Allow for Doubtful Debts 30/6 Balance c/d $21 100 30/6 Adjusting 19 600
to amount calculated) $21 100 $21 100
30/6 Balance b/d $21 100

2.
Problem 18.5 Doubtful debts – net credit sales and ageing methods
Allowance for Doubtful Debts

AUSSI WORLD LTD 30/6 Balance $1 500

30/6 Balance c/d $21 468 30/6 Adjusting 19 968
Required:
A. Prepare the journal entries to adjust the Allowance for Doubtful Debts at 30 June 2013 $21 468 $21 468
under: 30/6 Balance b/d $21 468
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 2012. Show the
journal entries to record the allowance for doubtful debts at 30 June 2013 under: C.
1. the net credit sales method
1.
2. the ageing of accounts receivable method.
D. Using the journal entries from requirement C, determine the balance in the allowance 30 June Bad Debts Expense $19 600
account under both methods.’
Allowance for Doubtful Debts $19 600
E. Explain, with reference to requirements B and D, why the two different methods result in
different balances. Allowance made on 2% of net credit sales.
A. Note the assumption here is that an under-provision
of $850 does not represent a significant variation.
2013 2.
1. 30 June Bad Debts Expense $19 600
Bad Debts Expense 22 318
Allowance for Doubtful Debts $19 600
Allowance for Doubtful Debts 22 318
Allowance made on 2% of net credit sales
($1 070 000 -$90 000) Allowance made on ageing of accounts receivable.
Required allowance $21 468 + $850

2. 30 June Bad Debts Expense 19 968

Allowance for Doubtful Debts 19 968
Allowance made on ageing of accounts receivable.
Required allowance is $21 468 - $1 500 =
$19 968

D. Problem 18.7 Doubtful debts – net credit sales and ageing methods

1.
PARSON’S BUILDERS PTY LTD
Allowance for Doubtful Debts
30/6 Balance $850 30/6 Adjusting $19 600 Required:
A. Prepare journal entries for each of the transactions.
30/6 Balance c/d 18 750 B. Determine (1) the balance in the Allowance for Doubtful Debts account after the 30 June
$19 600 $19 600 adjustment, and (2) the expected collectable amount of the accounts receivable as at 30 June.
C. Assume that instead of basing the allowance for doubtful debts on net credit sales, the
Balance b/d $18 750 estimate of uncollectable accounts is based on an ageing of accounts receivable and that $11
2. 630 of the accounts receivable as at 30 June was estimated to be uncollectable. Determine:
1. the general journal entry to bring the allowance account to the desired balance
Allowance for Doubtful Debts 2. the expected collectable amount of the accounts receivable as at 30 June.
30/6 Balance $850 30/6 Adjusting $22 318
30/6 Balance c/d 21 468
$22 318 $22 318 A.
Balance b/d $21 468
18 July Allowance for Doubtful Debts $510
GST Collections 51
Accounts Receivable – J Brooks $561
E. The net credit sales method and the ageing of accounts receivable method both calculate a To write off bad debt.
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
19 Oct Accounts Receivable – J Fuller 1 562
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 Bad Debts Recovered 1 420
entry for Bad Debts Expense is calculated by taking into account any opening balance in the GST Collections 142
allowance account to achieve the desired ending balance. Since the two methods involve To record bad debt recovered.
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. Oct 19 Cash at Bank 1 562
Accounts Receivable – J Fuller 1 562
To record cash received from debtor.

31 Jan Cash at Bank 396

Allowance for Doubtful Debts 540
GST Collections 54
Accounts Receivable – W Chan 990
To record amount received, and write off remainder
as a bad debt.
 B.

1.

Balance in the Allowance account after 30 June adjustment:

16 Feb Allowance for Doubtful Debts 5 550 Beginning balance $9 300
GST Collections 555
Less: Debits to the account during the year 7 770
Accounts Receivable – Foxon Co. Ltd 2 640
Accounts Receivable – D Ferres 3 465 Add: Credits to the account during the year -
To write off bad debts. Year end adjustment 9 465

Ending balance $10 995

20 Mar Cash at Bank 429
Allowance for Doubtful Debts 1 170
GST Collections 117 2.
Accounts Receivable – XL Painters 1 716
Expected collectable value of accounts receivable:
To record amount received and write off remainder
as a bad debt. 30 June balance of accounts receivable $189 200

Less: Allowance for doubtful debts 10 995

16 Apr Accounts Receivable – D Lowe 1 056
Bad Debts Recovered 960 Expected collectable value $178 205

GST Collections 96
To record bad debt recovered.

16 Apr Cash at Bank 1 056 C.

Accounts Receivable – D Lowe 1 056 1.
To record cash received from debtor.
Adjustment necessary at 30 June:

30 June Bad Debts Expense 9 465 Balance in allowance account before 30 June adjustment Cr $1 530
Allowance for Doubtful Debts 9 465 ($9 300 - $7 770)
Balance day adjustment.
Desired year-end balance Cr 11 630

Adjustment needed $10 100

30 June Bad debts expense $10 100

Allowance for doubtful debts $10 100

2.

Expected realisable value of accounts receivable:

30 June balance of accounts receivable $189 200

C.
Less: Allowance for doubtful debts 11 630
2013
Expected realisable value $177 570
Sept. Allowance for Doubtful Debts $11 230
GST Collections 1 123

Problem 18.8 Ageing of accounts receivable and adjustment of Accounts Receivable – Cathy $12 353
allowance Write-off Cathy account.

MYNN’S MOVING PTY LTD

Required:
D. There appears to be a problem with the estimation of the allowance for doubtful debts. The
A. Use the Ageing Analysis of Accounts Receivable to estimate the bad debts amount
B. Prepare the general journal adjusting entry to record estimated bad debts on 30 June 2013. write-off of Cathy’s account has wiped out the allowance for doubtful debts and given a
C. Give the entry to write off the account of Cathy in August 2013, $12 353. significant debit balance. While this will be addressed when the account is replenished at the
D. Do you have any comments or observations on Mynn’s Moving Pty Ltd’s credit policies? end of the period it represents an under-provision in the previous period and and over
estimation of profit. Mynn would be well advised to review large outstanding accounts. Of
particular concern is Derek who has been extended additional credit while owing money from
A.
6 months previously, this is poor credit control.
Current $43,021.00 1% $430.21
30 – 60 4%
days
outstanding
$3,245.00 $129.80 Problem 18.9 Bills receivable, including discounting
61 – 90 $9,746.00 10%
days
outstanding ADRIENNE LTD
$974.60
90 – 180 $12,353.00 25% Required:
days A. Determine the due date and the maturity value for each bill; for bills 1, 2 and 5, determine also the
outstanding discount period, the amount of discount, and the net proceeds.
$3,088.25 B. Prepare journal entries to record the discounting of bills 1, 2 and 5 at the bank.
180+ days $2,596.00 60% C. Prepare a general journal entry to accrue interest on bills 3, 4 and 6 on 30 June.
outstanding D. Prepare general journal entries to record the collection of bills 3, 4 and 6 in the next financial
$1,557.60 year.
E. Prepare journal entries, if any, to record effect of bill 5 being dishonoured.
Estimated Bad Debts (inc GST): $6,180.46
Estimated Bad Debts (ex. GST): $5,618.60

B.

June 30 Bad Debts Expense $4 468

Allowance for Doubtful Debts $4 468
Record allowance for doubtful debts.
 C.

A. June 30 Unearned interest $262.40

Interest revenue $262.40
Due Date Mat. Value Disc. Period Amount of Proceeds
Interest earned on Bills
Discount
1. 31 May $9 118.36 30 days $74.95 $9 043.41
2. 31 July $15 332.88 50 days $231.04 $15 101.84
5. 7 Aug. $12 157.81 44 days $146.56 $12 011.25 Unearned interest Interest earned to Interest unearned
3. 14 July $12 197.26 - - - recorded on date 30 June at 30 June
4. 31 July $7 610.96 - - - bill accepted
6. 15 Aug. $15 246.58 - - - Bill 3 $197.26 ($197.26 x 46/60) = $151.23 $46.03
Bill 4 110.96 ($110.96 x 29/60) = 53.63 57.33
Bill 6 246.58 ($246.58 x 14/60) = 57.54 189.04
$554.80 $262.40 $292.40

B.

May 1 Cash at bank $9 043.41

Unearned interest 74.95 D.

Bills receivable $9 118.36 July 14 Cash at bank $12 197.26

Discounting Bill no 1. Unearned interest 46.03
Interest revenue $46.03
June 11 Cash at bank 15 101.84 Bills receivable 12 197.26
Unearned interest 231.04
Bills receivable 15 332.88 July 31 Cash at bank 7 610.96
Discounting Bill no 2. Unearned interest 57.33
Interest revenue 57.33
Bills receivable 7 610.96
June 24 Cash at bank 12 011.25
Unearned interest 146.56
Bills receivable 12 157.81
Discounting Bill no 5.
Aug 15 Cash at bank 15 246.58
Unearned interest 189.04
Interest revenue 189.04
Bills receivable 15 246.58

Problem 18.10 Monitoring cash collection

BALLINA BEACHWEAR LTD

Required:
A. Calculate the following for years 2014 and 2015:

1. the receivables turnover ratio

2. average collection period of accounts receivable.
B. Based on the ratios calculated in requirement A, comment on the credit collection policies of
the company. What additional information would make an analysis of cash collection
policies more meaningful?

A.

2014 2015
Receivables turnover ratio:
Net credit sales revenue $1 120 000 $1 130 000
Average receivables ($102 000 + $108 000)/2 ($108 000 + $124 000)/2
= 10.67 times = 9.74 times
Average collection period 365 days 365 days
10.67 9.74
= 34 days = 37days

B. The 2014 and 2015 ratios indicate a relaxation of credit collection policy. In 2014 receivables
turned over or were paid in full 10.67 times a year compared to 9.74 times in 2015. The
position has worsened between 2014 and 2015. This trend needs to be addressed and reversed
as soon as possible.

This is also emphasised in the average collection period - the days it took to collect accounts
receivables in full increased from 34 days in 2014 to 37 days in 2015. If the credit policy
allows for payment in 30 days it appears, on average, debtors were paying within a reasonable
time period in 2014, but this has worsened in 2015. If the trend is not addressed, cash flow
problems could arise in the future.

A review of the credit department to examine existing credit policies could be undertaken.
The procedures for assessing credit worthiness of potential customers, continuous monitoring
of accounts receivable using ageing analysis, communications with customers, and collection
procedures for slow payers would be required.