- 10 Marks
FA – L1 – Q34 – Bad and doubtful debt
Question
Kwame commenced trading on 1 April 20X6. He extracted the following list of balances from his sales ledger as at 31 March 20X7:
| GH₵ | |
|---|---|
| Kojo | 200,000 |
| Ama | 400,000 |
| Others | 6,300,000 |
| 6,900,000 |
In the year to 31 March 20X7:
(1) Kojo emigrated leaving numerous debts.
(2) Ama is disputing certain invoices, amounting to GH₵100,000, which have been outstanding for more than six months. Kwame estimates that Ama will eventually pay half the disputed amount.
In the year to 31 March 20X8:
The sales ledger listing as at 31 March 20X8 is as follows:
| GH₵ | |
|---|---|
| Esi | 240,000 |
| Adwoa | 400,000 |
| Ama | 60,000 |
| Others | 6,600,000 |
| 7,300,000 |
(1) Esi has been declared bankrupt and her debt is to be written off.
(2) Adwoa is experiencing cash flow difficulties. Kwame considers a 50% allowance to be appropriate.
(3) Kwame is no longer supplying goods to Ama. The balance, which is in respect of last year’s disputed invoices, is to be written off.
In the year to 31 March 20X9:
(1) Total receivables per the sales ledger listing are GH₵7,500,000 as at 31 March 20X9.
(2) There are no debts requiring specific allowance.
(3) GH₵50,000 has been received from Esi.
Required
Assuming that Kwame requires a general allowance for receivables of 5%, write up the irrecoverable debt expense and allowance accounts for the three years to 31 March 20X9.
Answer
Irrecoverable debt expense a/c
| 20X7 | GH₵(000) | 20X7 | GH₵(000) |
|---|---|---|---|
| Receivables (Kojo) | 200 | Statement of profit or loss | 515 |
| Allowance for receivables | 315 | ||
| 515 | 515 |
| 20X8 | GH₵(000) | 20X8 | GH₵(000) |
|---|---|---|---|
| Receivables (Esi) | 240 | Statement of profit or loss | 575 |
| Receivables (Ama) | 60 | ||
| Allowance for receivables | 275 | ||
| 575 | 575 |
| 20X9 | GH₵(000) | 20X9 | GH₵(000) |
|---|---|---|---|
| Allowance for receivables | 75 | Cash (Esi recovery) | 50 |
| Statement of profit or loss | 25 | ||
| 75 | 75 |
Allowance for receivables a/c
| 20X7 | GH₵(000) | 20X7 | GH₵(000) |
|---|---|---|---|
| 31 Mar Balance c/d | 365 | 1 Apr Irrecoverable debt expense | 365 |
| 365 | 365 |
| 20X8 | GH₵(000) | 20X8 | GH₵(000) |
|---|---|---|---|
| 31 Mar Balance c/d | 640 | 1 Apr Balance b/d | 365 |
| Irrecoverable debt expense | 275 | ||
| 640 | 640 |
| 20X9 | GH₵(000) | 20X9 | GH₵(000) |
|---|---|---|---|
| Irrecoverable debt expense | 75 | 1 Apr Balance b/d | 640 |
| 31 Mar Balance c/d | 565 | ||
| 640 | 640 |
Workings
- 20X7 Allowance:
- Specific (Ama): 50% × 100,000 = 50,000
- General: 5% × (6,900,000 – 200,000 – 100,000) = 315,000
- Total: 50,000 + 315,000 = 365,000
- 20X8 Allowance:
- Specific (Adwoa): 50% × 400,000 = 200,000
- General: 5% × (7,300,000 – 240,000 – 60,000 – 400,000) = 330,000
- Total: 200,000 + 330,000 = 530,000
- Increase: 530,000 – 365,000 = 165,000 (adjusted in expense account).
- Note: Esi and Ama written off, so allowance recalculated.
- 20X9 Allowance:
- General: 5% × 7,500,000 = 375,000
- Decrease: 640,000 – 375,000 = 265,000 (netted with recovery in expense account).
- Esi recovery (50,000) reduces expense.
- Topic: Bad and doubtful debt
- Uploader: Samuel Duah