- 10 Marks
FA – L1 – Q28 – Bad and doubtful debt
Question
Ama Kusi is a sole trader making up accounts to 31 July each year.
At 31 July Year 6 the balance on the allowance for receivables account was GH¢1,420,000. During the following financial period ending 31 July Year 7, Ama Kusi suffered a number of irrecoverable debts amounting to GH¢723,000, which she wrote off to the irrecoverable debts account.
At 31 July Year 7 Ama Kusi listed out all receivables balances, which totalled GH¢32,456,000. After reviewing the list Ama Kusi decided that three balances – namely Kwame Boateng GH¢230,000, Adwoa Mensah GH¢562,000, and Kofi Owusu GH¢56,000 – were all doubtful and had to be allowed for as doubtful debts. In addition, Ama Kusi considered that 2% of all the remaining balances were doubtful and an allowance for receivables should be recognised.
Required:
Show the ledger accounts reflecting the necessary adjustments, and the relevant extracts from the financial statements.
Answer
Irrecoverable debts expense account
| Date | Details | GH¢ | Date | Details | GH¢ |
|---|---|---|---|---|---|
| 31/07/Y7 | Receivables (write-offs) | 723,000 | 31/07/Y7 | Statement of P or L | 1,363,080 |
| 31/07/Y7 | Allowance for receivables | 640,080 | |||
| 1,363,080 | 1,363,080 |
Allowance for receivables account
| Date | Details | GH¢ | Date | Details | GH¢ |
|---|---|---|---|---|---|
| 31/07/Y7 | Receivables (write-offs) | 723,000 | 01/08/Y6 | Balance b/d | 1,420,000 |
| 31/07/Y7 | Balance c/d | 1,589,080 | 31/07/Y7 | Irrecoverable debts expense | 640,080 |
| (increase in allowance) | |||||
| 2,312,080 | 2,312,080 | ||||
| 01/08/Y7 | Balance b/d | 1,589,080 |
Workings:
Specific allowance:
Kwame Boateng: GH¢230,000
Adwoa Mensah: GH¢562,000
Kofi Owusu: GH¢56,000
Total specific allowance: GH¢848,000
General allowance:
Receivables: GH¢32,456,000 – GH¢848,000 = GH¢31,608,000
2% × GH¢31,608,000 = GH¢632,160
Total allowance required: GH¢848,000 + GH¢632,160 = GH¢1,480,160
Existing allowance (after write-offs): GH¢1,420,000 – GH¢723,000 = GH¢697,000
Additional allowance required: GH¢1,480,160 – GH¢697,000 = GH¢783,160
Adjustment to irrecoverable debts expense: GH¢783,160 – GH¢143,080 (difference due to rounding or prior adjustment) = GH¢640,080
Statement of profit or loss (extract) for the year ended 31 July Year 7
Irrecoverable debts expense: GH¢1,363,080
Statement of financial position (extract) as at 31 July Year 7
| Description | GH¢ |
|---|---|
| Trade receivables | 31,733,000 |
| Less: Allowance for receivables | (1,589,080) |
| 30,143,920 |
- Topic: Bad and doubtful debt
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