Question Tag: Trade receivables

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  • 20 Marks

CR – Nov 2023 – L3 – SB – Q4 – Financial Instruments (IFRS 9)

Discuss IFRS 9 derecognition rules, trade receivables factoring, and FVTOCI investment strategy for Pelumi Limited.

a. Derecognition of financial instruments is the removal of a previously recognised financial asset or liability from an entity’s statement of financial position.

Required:
Discuss the rules of IFRS 9 – Financial Instruments relating to the derecognition of a financial asset. (10 Marks)

b. Royal Business Limited (RBL) held a portfolio of trade receivables with a carrying amount of N40 million as of May 31, 2022. At that date, the entity entered into a factoring agreement with Hexlinks Bank Limited (HBL), whereby it transfers the receivables in exchange for N36 million in cash. Royal Business Limited has agreed to reimburse the factor (HBL) for any shortfall between the amount collected and N36 million. Once the receivables have been collected, any amount above N36 million, less interest on this amount, will be repaid to Royal Business Limited. Royal Business Limited has derecognised the receivables and charged N4 million as a loss to profit or loss.

Required:
Explain how the rules of derecognition of the financial assets will affect the portfolio of trade receivables in Royal Business Limited’s financial statements. (3 Marks)

c. During the year 2021, Pelumi Limited invested in 800,000 shares in an NGX quoted company. The shares were purchased at N4.54 per share. The broker collected a commission of 1% on the transaction. Pelumi Limited elected to measure their shares at fair value through other comprehensive income (FVTOCI). The quoted share price as of December 31, 2021, was N4.22 to N4.26. Pelumi Limited decided to adopt a ‘sale and buy back’ strategy for the shares to realise a tax loss and therefore sold the shares at the market price on December 31, 2021, and bought the same quantity back the following day. The market price did not change on January 1, 2022. The broker collected a 1% commission on both transactions.

Required:
Explain the IFRS 9 accounting treatment of the above shares in the financial statement of Pelumi Limited for the year ended December 31, 2021.
Note: Show relevant calculations. (7 Marks)

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  • 1 Marks

FA – May 2013 – L1 – SA – Q24 – Recording Financial Transactions

This question involves calculating payments on account receivables during the year.

During a financial year, a company’s financial records reveal the following:

  • Cash Revenue: N100,000
  • Credit Revenue: N500,000
  • Trade receivables at the beginning of the year: N30,000
  • Trade receivables at the end of the year: N44,000

What were the payments on account receivables during the year?

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  • 1 Marks

FA – May 2013 – L1 – SA – Q22 – Accounting Treatment for Bad and Doubtful Debts

This question involves calculating the net trade receivables after applying provision for doubtful debts and discount.

The trial balance of a business shows a trade receivables balance of N90,000. Provision for doubtful debts is 5% of total receivables, while provision for discount on receivables is 2%. The amount to show in the Financial Statements as net trade receivables would be:

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Has Case Study
  • 5 Marks

SCS – Nov 2021 – L3 – Q7b – Sources of Finance

Analyze the net benefit of the proposed factoring arrangement for COM.

The management of COM is seeking advice from the finance team on whether or not to accept the proposed trade receivable factoring arrangement. The management is interested in knowing whether the factoring arrangement will benefit the company in totality.

 

Required:
You are the Financial Controller, and the CFO has assigned you the responsibility to determine the net benefit of the factoring financing arrangement. Prepare a brief presentation on the net benefit of the proposed factoring arrangement to be submitted to the CFO.

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  • 1 Marks

BL – Nov 2019 – L1 – SA – Q8 – Law of Contract

Determining the net amount of trade receivables to be recognised in the statement of financial position

What is the net amount of trade receivables recognised in the statement of financial position?
A. N1,110,000
B. N1,201,000
C. N1,210,300
D. N1,274,000
E. N1,300,000

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  • 1 Marks

BL – Nov 2019 – L1 – SA – Q7 – Law of Contract

Calculating the amount of allowance for trade receivables in the profit or loss statement

What is the amount of allowance recognised in the statement of profit or loss?

A. N26,000
B. N63,700
C. N89,300
D. N89,700
E. N98,700

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  • 20 Marks

FA – May 2023 – L1 – SB – Q1 – Recording Financial Transactions, Bad and Doubtful Debts

Preparation and balancing of Trade Receivables, Bad Debts, and Allowances for Doubtful Debts accounts.

It was discovered on December 31, 2016, Baruwa Limited had a receivables balance of N15,000,000. It was discovered, before the preparation of the final accounts, that a customer owing N3,000,000 would not be able to settle such debts. It is the policy of Baruwa Limited to make allowances for doubtful receivables of 5% of all outstanding receivables at the end of each accounting period.

During the accounting year of 2017, the company made total credit sales of N19,600,000, out of which an amount of N11,000,000 was collected from customers. A court declared a customer who owes the company an amount of N1,700,000 bankrupt in August 2017. The company recorded some cheques amounting to N3,500,000 that were dishonoured.

The company recorded N30,000,000 and N17,000,000 in connection with cash and credit sales, respectively, in the year 2018. The company received N25,000,000 from trade receivables and also showed N13,400,000 as the outstanding balance on the sales ledger account. A cheque was received from the customer whose debt was written off in 2016 in full settlement of his debt.

Required:

Prepare and balance the following accounts:

a. Trade Receivables Account (8 Marks)

b. Bad Debts Account (3 Marks)

c. Allowances for Doubtful Receivables Account (3 Marks)

d. Prepare an extract of the Statement of Financial Position as at December 31, 2018, showing the relevant balances. (6 Marks)

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  • 8 Marks

FA – May 2017 – L1 – SB – Q6c – Accounting Treatment for Bad and Doubtful Debts

Prepare the bad debts and allowance for doubtful receivables ledger accounts for Funke Limited.

Funke Limited’s management, based on the prudence principle, evaluated its trade receivables accounts over a period of three years ending on December 31 each year. The following were the extracts from the records of the outcome of the evaluation:

Year Trade Receivables (₦) Bad Debts (₦) Allowance for Doubtful Receivables (%)
2014 654,000 24,000 2%
2015 745,000 18,000 2%
2016 585,000 22,000 2%

The value stated for trade receivables was net of the bad debts but before the allowance for bad debts. There was no allowance for bad debt before 2014.

Required: Prepare the ledger accounts for Bad Debts and Allowance for Doubtful Receivables.

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  • 6 Marks

FA – May 2017 – L1 – SB – Q3a – Accounting Treatment for Bad and Doubtful Debts

Prepare ledger accounts for receivables, bad and doubtful debts, and allowance for doubtful receivables.

The trial balance of Prudent Limited included the following balances as at October 1, 2015:

Account Amount (₦)
Trade receivables 1,564,000
Allowance for doubtful receivables 78,200

During the year to September 30, 2016, Prudent Limited’s credit sales were ₦8,142,000, cash received from customers was ₦7,820,000, and bad debts written off were ₦46,000. Based on experience, Prudent Limited decided to recognize additional allowance of 5% on its receivables as doubtful.

Required:
Prepare the ledgers for:

  1. Receivables Account
  2. Bad and Doubtful Debt Expense Account
  3. Allowance for Doubtful Receivables Account
    (6 Marks)

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  • 1 Marks

FA – Nov 2019 – L1 – SA – Q8 – Accounting Treatment for Bad and Doubtful Debts

Calculate the net amount of trade receivables recognized in the statement of financial position.

What is the net amount of trade receivables recognized in the statement of financial position?

The following is an information extract from the books of accounts of Walling Parking Enterprises, a sole trader:

  • Trade receivables balance for the period: N1,300,000
  • The chance of collecting 2% of the receivables figure is remote.
  • It is virtually certain that 95% of the balance of the receivables is collectable.

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  • 20 Marks

AA – Mar 2023 – L2 – Q3 – Audit and Assurance Evidence

Explain why property, plant and equipment, trade receivables, and inventory were selected for further investigation.

Maggie Manufacturing is a long-established manufacturing company. The audit manager has been provided with the following extracts from the draft financial statements for 2021, prior to the final audit planning meeting with the financial controller.

Draft Statement of Financial Position (Extracts):

The manager has reviewed these extracts and has identified three financial statement headings that require further investigation: property, plant, and equipment, trade receivables, and inventory. He has also calculated certain accounting ratios.

Required:
a) Explain why the manager has selected these three headings for further investigation.

b) Detail and explain the further information that the manager should request from the financial controller at the final audit planning meeting to clarify the situation with regards to the three financial statement headings.

 

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  • 13 Marks

AA – May 2020 – L2 – Q3a – Audit and Assurance Evidence

Explain the main assertions about account balances and give examples from the audit of trade receivables.

Audit Evidence requires the auditor to obtain sufficient, appropriate evidence to be able to draw reasonable conclusions on which to base the audit opinion. That evidence should be relevant to the financial statement assertions.

Required:
i) Explain the main assertions about account balances and provide an example of each one by reference to the audit of trade receivables. (8 marks)

ii) Identify FIVE (5) of the seven main audit testing procedures (e.g., inspection) and give an example of how each might be used in the audit of plant and machinery. State the assertion being tested in each case. (5 marks)

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  • 10 Marks

AAA – May 2021 – L3 – Q5b – Audit-related services | Assurance services

Discuss how audit software can be used to audit revenue and trade receivables and evaluate the extent of reliance on internal auditor's use of embedded software.

Mike Developers’ Audit Manager is of the view that audit software can be used effectively in the audit of revenue and trade receivables. He has discussed this with the firm’s computer audit department and with Mike Developers’ Finance Director, and this approach has been agreed as a feasible one. Furthermore, the Finance Director has asked the internal audit team to investigate the possibility of installing embedded software to help the external auditors in their work.

Required:

i) Describe, giving examples, how audit software, in general, could assist the audit firm in their audit of revenue and trade receivables. (6 marks)

ii) Discuss the extent to which the external auditor could rely on the results of the internal auditor’s use of embedded software. (4 marks)

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  • 10 Marks

FA – Mar 2024 – L1 – Q2a – Bad and doubtful debt

Prepare the trade receivables, bad debt expense, and allowance for doubtful debts accounts for Lukay's sales transactions over three years.

Lukay is a wholesaler who is into the distribution of soft drinks. Lukay has been in operation for some time now, and the following transactions in relation to sales occurred in the first 3 years:

Year 1
Lukay made credit sales of GH¢60,000 and received GH¢45,000 from his credit customers. At the end of the year, she decided to write off Abrantie’s debt of GH¢2,400, made a specific allowance for Keke’s debt totaling GH¢1,050, and created a general allowance of 5% of the remaining trade receivables balance.

Year 2
During the second year of trading, Lukay made credit sales of GH¢90,000 and received cash of GH¢84,000, including GH¢1,200 from Abrantie. He decided to write off Keke’s debt and create a specific allowance against 50% of Yakubu’s total debt of GH¢1,800. He decided that his general allowance should now be 8% of the remaining trade receivables balance.

Year 3
Lukay made credit sales of GH¢150,000 and received cash of GH¢120,000. Additionally, he also received a cheque from Yakubu for GH¢1,800. At the year-end, he decided to create a specific allowance against Atia’s debt of GH¢15,000 and maintained his general allowance at 8%.

Required:

For each of the above years, show the trade receivables account, bad debt expense account, and allowance for doubtful debts account, and the statement of financial position extract as at each year-end. (10 marks)

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  • 9 Marks

FM – MAY 2019 – L2 – Q4a – Management of receivables and payables

Analyze the impact of using a factor on annual profits for Lisa-Joys Company, considering savings on bad debts, administration costs, and interest.

Question:
Lisa-Joys Company has annual credit sales of GH¢1,000,000. Credit customers take 45 days to pay. Bad debts are 2% of sales. The company finances its trade receivables with a bank overdraft, on which interest is payable at an annual rate of 15%.

A factor has offered to take over administration of the receivables ledger and collections for a fee of 2.5% of the credit sales. This will be a non-recourse factoring service. It has also guaranteed to reduce the payment period to 30 days. It will provide finance for 80% of the trade receivables, at an interest cost of 8% per year.

Lisa-Joys Company estimates that by using the factor, it will save administration costs of GH¢8,000 per year.

Required:
What would be the effect on annual profits if Lisa-Joys Company decides to use the factor’s services? (Assume a 365-day year). (9 marks)

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