Trade Receivables

FR – L2 – Q64 – Revenue from Contracts with Customers

Recalculate AX Ltd's profit for the year ended 31 March 20X9, adjusting for sale or return, depreciation, fraud, and tax.

Question

AX LTD
Below is the summarised draft statement of financial position of AX Ltd, a company listed on the West Africa Stock Exchange, as at 31 March, 20X9:

Non-current assets
Property at valuation (land GH₵20,000; buildings GH₵165,000) (note ii)	185,000
Plant (note ii)	180,500
Financial assets at fair value through profit or loss at 1 April 20X8 (note iii)	12,500
	378,000
Current assets
Inventory	84,000
Trade receivables (note iv)	52,200
Bank	3,800
	140,000
Total assets	518,000

Equity and Liabilities
Equity
Stated capital	290,000
Capital surplus	12,300
Income surplus
– At 1 April 20X8	96,700
– For the year ended 31 March 20X9	12,300
	109,000
	411,300
Non-current liabilities
Deferred tax – at 1 April 20X8 (note v)	19,200
Current liabilities	81,800
	101,000
Total equity and liabilities	518,000

The following information is relevant:
(i) AX Ltd’s statement of profit or loss includes GH₵8million of revenue for credit sales made on a “sale or return” basis. At 31 March 20X9, customers who had not paid for the goods, had the right to return GH₵2.6million of them. AX Ltd applied a mark-up on cost of 30% on all these sales. In the past, AX Ltd’s customers have sometimes returned goods under this type of agreement.
(ii) The non-current assets have not been depreciated for the year ended 31 March 20X9. AX Ltd has a policy of revaluing its land and buildings at the end of each accounting year. The values in the above statement of financial position as at 1 April 20X8 when the building had a remaining life of 15 years. A qualified surveyor has valued the land and buildings at 31 March 20X9 at GH₵180million. Plant is depreciated at 20% on the reducing balance basis.
(iii) The financial assets at fair value through profit or loss are held in a fund whose value changes directly in proportion to a specified market index. At 1 April 20X8 the relevant index was 1,200 and at 31 March 20X9 it was 1,296.
(iv) In late March 20X9 the directors of AX Ltd discovered a material fraud perpetrated by the company’s credit controller that had been continuing for some time. Investigations revealed that a total of GH₵4 million of the trade receivables as shown in the statement of financial position at 31 March 20X9 had in fact been paid and the money had been stolen by the credit controller. An analysis revealed that GH₵1.5 million had been stolen in the year to 31 March 20X8 with the rest being stolen in the current year. AX Ltd is not insured for this loss and it cannot be recovered from the credit controller, nor is it deductible for tax purpose.
(v) During the year, the company’s taxable temporary differences increased by GH₵10 million of which GH₵6 million related to the revaluation of the property. The deferred tax relating to the remainder of the increase in the income tax rate is 20%.
(vi) The above figures do not include the estimated provision for income tax on the profit for the year ended 31 March 20X9. After allowing for any adjustments required in terms (i) to (iv), the directors have estimated the provision of GH₵11.4 million (this is in addition to the deferred tax effects of item (v).
(vii) During the year, dividends of GH₵15.5 million were paid. These have been correctly accounted for in the above statement of financial position.

Required:
Taking into account any adjustments required by items (i) to (vii) above:
(a) Prepare a statement showing the recalculation of AX Ltd’s profit for the year ended 31 March 20X9; and

(b) Redraft the statement of financial position of AX Ltd as at 31 March 20X9.

Answer

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Tags: Deferred Tax, Depreciation, Financial Position, Fraud, Inventory, Revaluation, Trade Receivables
Level: Level 2

Topic: Inventory Accounting

FM – L2 – Q111 – Management of receivables and payables

Calculate the annual interest cost of offering a 2% settlement discount for payment within 7 days, given a 90-day credit period.

Question

(A). A business entity offers its customers trade credit of 90 days. It is considering whether to offer a settlement discount of 2% for payment within seven days.

Required

Calculate the cost of offering the discount, as an annual interest cost.

(B). Entity K has monthly sales of GH₵100,000. A factor has offered to take over the administration of Entity K’s trade receivables, on a non-recourse basis (or without recourse basis). It would charge a fee of 4% of the value of invoices processed. If the factor takes over this work, Entity K would save monthly administration costs of GH₵2,000 and would avoid its bad debts, which are 0.75% of sales.

Entity K has been informed by the factor that the average collection period (the time between issuing an invoice and receiving payment from the customer) will be reduced from 2 months to 1 month.

The factor will also provide finance by lending 80% of the value of unpaid invoices, charging interest at an annual rate of 8% on the cash that it lends. At the moment, Entity K finances its trade receivables with bank overdraft finance at 9% per year interest.

Required

Calculate the net effect on annual profits of Entity K if the factor took over the administration of the trade receivables and provided finance on the terms described above.

Answer

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Tags: Bad Debts, Cost-benefit analysis, Credit administration, Factoring, Interest cost, Non-recourse factoring, Trade Receivables
Level: Level 2

Topic: Management of receivables and payables

L2 – Q110 – Trade Receivables Management

Calculate the effect of reducing credit period on Entity N's annual profit, considering sales reduction, bad debts, and overdraft costs.

Question

Entity N is reviewing its credit policy. It is estimated that if the period of credit allowed to customers is reduced to 60 days, there will be a 25% reduction in annual sales, but bad debts would be reduced by GH¢30,000 each year. It would also be necessary to spend an extra GH¢20,000 each year on credit control. Entity N has cash flow difficulties and relies on overdraft finance, for which the interest rate is 9%.

Required
Calculate the effect of these changes on the annual profit. Base your answer on the level of sales in Year 3, and assume that purchases and inventory would be reduced in the same proportion as the reduction in sales.

Entity N – Extracts from annual accounts	Year 3
Inventory	GH¢
Raw materials	180,000
Work in progress	93,360
Finished goods	142,875
Purchases	720,000
Cost of goods sold	1,098,360
Sales	1,188,000
Trade receivables	297,000
Trade payables	126,000

Answer

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Tags: Bad Debts, Credit Control, Credit Policy, Overdraft Finance, Profit Impact, Sales Reduction, Trade Receivables, Working Capital
Level: Level 2

Topic: Management of receivables and payables

FM – L2 – Q104 – Working Capital Management

Analyze Peak Enterprises Limited's financial statements to determine if it is overtrading and discuss its implications.

Question

Peak Enterprises Limited is a small manufacturing company. Its summarized accounts for the last two years are presented below:

Statements of Financial Position as at 31st March

	Year 5 (GH¢’000)	Year 6 (GH¢’000)
Fixed Assets	1,130	1,080
Current Assets
Inventory	210	260
Trade Receivables	120	160
Cash	30	–
Total Current Assets	360	420
Total Assets	1,490	1,500
Equity and Liabilities
Equity Shares of GH¢0.25	200	200
Accumulated Profits	680	500
Total Equity	880	700
Medium-Term Bank Loan	200	150
Current Liabilities
Bank Overdraft	140	250
Trade Payables	200	280
Other Payables	70	120
Total Current Liabilities	410	650
Total Equity and Liabilities	1,490	1,500

Statements of Profit or Loss for the Year Ending 31st March

	Year 5 (GH¢’000)	Year 6 (GH¢’000)
Sales	1,800	2,900
Gross Profit	210	260
Profit Before Tax	120	160
Taxation	(30)	(40)

Required
(a) Comment on whether there is any evidence that Peak Enterprises Limited is overtrading.
(b) Discuss the implications of overtrading for Peak Enterprises Limited.

Answer

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Tags: Bank Overdraft, Cash Flow, Equity financing, Financial Ratios, Inventory Management Civilian Financial Statements, Overtrading, Trade Payables, Trade Receivables, Working Capital
Level: Level 2

Topic: Working capital management

FA – L1 – Q91 – Inventory

Calculate closing inventory given sales, purchases, opening inventory, and a 25% mark-up.

Question

(a) A business makes all of its sales at a mark-up of 25%. During the year sales totalled GH¢98,000 and purchases were GH¢71,000. The inventory at the start of the year was valued at GH¢10,200.

What was the value of the closing inventory at the end of the year?

(b) A business has the following assets and liabilities at the start and end of March.

	1 March	31 March
	GH¢	GH¢
Trade receivables	6,100	7,400
Trade payables	3,900	3,500

The summarised bank statements for the year showed the following figures:

Bankings for the year were GH¢78,500
Payments to suppliers for the year were GH¢49,700
The owner banks her takings from the till each month but before doing so in March she took GH¢5,000 for her own use.

What are the sales for the year?

(c) An accountant has prepared the following list of the assets and liabilities of a business, but has forgotten to enter the cash balance.

	GH¢
Trade payables	4,900
Inventory	9,300
Non-current assets	98,900
Capital	97,200
Bank loan	15,700
Receivables	16,800
Bank

What is the missing figure for ‘Bank’?

Answer

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Tags: Bankings, Drawings, Financial accounting, Sales, Trade Payables, Trade Receivables
Level: Level 1

Topic: Sales and Purchases

FA – L1 – Q51 – Control accounts and account reconciliations

Prepare a corrected trade receivables control account for Tobi and Co for the year ended 31 October 20X9, adjusting for identified errors.

Question

Tobi and Co sells goods on credit to most of its customers. In order to control a debt collection system, the company maintains a trade receivables ledger control account. In preparing the accounts for the year to 30 October 20X9 the accountant discovers that the total of all the personal accounts in the trade receivables’ ledger amounts to GH¢12,802, whereas the control account balance discloses a balance of GH¢12,550.
Upon investigation the following errors were discovered:
(1) Sales for the week ending 27 March 20X9 amounting to GH¢850 had been omitted from the control account.
(2) An account balance of GH¢300 had not been included in the list of balances.
(3) Cash received of GH¢750 had been entered in a personal account as GH¢570.
(4) A customer had qualified for an early settlement discount when not expected to do so. The amount of GH¢100 had not been entered in the control account.
(5) A personal account balance had been undercast by GH¢200.
(6) A contra item of GH¢400 with the trade payables ledger had not been entered in the control account.
(7) An irrecoverable debt of GH¢500 had not been entered in the control account.
(8) Cash received of GH¢250 had been debited to a personal account.
(9) Discounts received of GH¢50 had been debited to a customer’s ledger account.
(10) Returns inwards valued at GH¢200 had not been included in the control account.
(11) Cash received of GH¢80 had been credited to a personal account as GH¢8.
(12) A cheque for GH¢300 received from a customer had been dishonoured by the bank, but no adjustment had been made in the control account.

Required:
(a) Prepare a corrected trade receivables control account, bringing down the amended balance at 31 October 20X9.

(b) Prepare a statement showing the adjustments that are necessary to the list of personal account balances so that it reconciles with the amended control account balance.

Answer

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Tags: Control Accounts, Error Correction, Financial accounting, ledger reconciliation, Trade Receivables
Level: Level 1

Topic: Control accounts and account reconciliations

FA – L1 – Q50 – Control accounts and account reconciliations

Prepare a receivables control account for Wako Associates with adjustments for errors identified in the sales ledger as of 31 December 20X9.

Question

The net sales ledger balances of Wako Associates aggregated GH¢319,000 as on December 31, 20X9. However, the receivables control account showed balance of GH¢350,410. On checking the following errors were identified:
(i) A credit balance amounting to GH¢1,200 had been omitted from the list of balances.
(ii) The Sales Return Book had been undercast by GH¢12,000.
(iii) A balance owed by Murad amounting to GH¢2,100 had been written off by debiting irrecoverable debts and crediting allowance for receivables accounts.
(iv) A debit balance of GH¢2,600 in the sales ledger had been listed as a credit balance.
(v) No entry had been made in the control account to record transfer of GH¢3,600 standing to the credit of David’s account in the purchases ledger to his account in the sales ledger.
(vi) Goods returned by Kwame amounting to GH¢1,700 were credited to his account in the sales ledger but debited to purchase account in the general ledger.
(vii) Enoch had been expected to take a settlement discount of GH¢800 and this had been correctly accounted for. However, Enoch did not settle on time and thus did not qualify for the discount.
(viii) A dishonoured bill of exchange from AC & Company for GH¢1,800 was properly entered in sales ledger but was debited to miscellaneous expense account in general ledger.
(ix) GH¢450 received from Thompson & Co., a customer, were correctly posted in the control account but was debited in the customers ledger as GH¢540.
(x) The trial balance included a credit balance of GH¢18,000 in the suspense account. It was revealed that 60% of the amount represents posting errors in the receivables control account.

Required:
(a) The receivables control account showing the necessary adjustments.

(b) A statement reconciling the receivables ledger balance with the corrected balance of the receivables control account.

Answer

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Tags: Account Reconciliation, Adjustments, Double Entry, Error Correction, Financial accounting, Ledger balances, Receivables control account, Sales Ledger, suspense account, Trade Receivables
Level: Level 1

Topic: Control accounts and account reconciliations

FA – L1 – Q35 – Bad and doubtful debt

Write up receivables, irrecoverable debts expense, and allowance accounts for three years with specific and general allowances, including financial position extracts.

Question

In her first year of trading to 31 December 20X7, Akosua made credit sales of GH₵200,000 and received GH₵150,000 from credit customers.
At the end of the year, she decided to write off Abena’s debt of GH₵8,000, make a specific allowance for Kofi’s debt totalling GH₵3,500, and create a general allowance of 5% of remaining trade receivables.
During her second year of trading, she made sales on credit of GH₵300,000 and received cash of GH₵280,000, including GH₵4,000 from Abena. At 31 December 20X8, she decided to write off Kofi’s debt and create a specific allowance against 50% of Esi’s total debt of GH₵6,000. She decided that a general allowance should now be 8% of remaining accounts receivable.
In the year to 31 December 20X9, Akosua made credit sales of GH₵500,000 and received cash of GH₵400,000. Separate from this, she also received a cheque from Esi for GH₵6,000.
At the year-end, she decided to create a specific allowance against Kwame’s debt of GH₵50,000 and maintain a general allowance at 8%.

Required
For each of the above years, show the trade receivables account, irrecoverable debt expense account, and allowance for receivables account, and the statement of financial position extract as at each year end.

Answer

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Tags: Allowance for receivables, Bad Debts, Cash receipts, Credit Sales, Doubtful debts, Ghana, Irrecoverable debts, Ledger accounts, Trade Receivables, Year-end adjustments
Level: Level 1

Topic: Bad and doubtful debt

FA – L1 – Q34 – Bad and doubtful debt

Write up irrecoverable debt expense and allowance for receivables accounts for three years with specific and general allowances.

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

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Tags: Allowance for receivables, Bad Debts, Credit Sales, Doubtful debts, Ghana, Irrecoverable debts, Ledger accounts, Trade Receivables, Year-end adjustments
Level: Level 1

Topic: Bad and doubtful debt

FA – L1 – Q33 – Bad and doubtful debt

Write up receivables, irrecoverable debts expense, and allowance for receivables accounts for two years, including recovery of written-off debt.

Question

Kofi, a trader, had receivables of GH₵50,000,000 at 30 June 20X7. He decided to establish an allowance for receivables balance based on 5% of the account balance at the statement of financial position date. He made the first allowance at 30 June 20X7.
The following relates to the years ended 30 June 20X8 and 30 June 20X9:

	Year ended 30 June
	20X8	20X9
	GH₵(000)	GH₵(000)
Credit sales	480,000	550,000
Cash received from customers	432,000	560,600
Irrecoverable debts written off	6,000	2,000

On 30 September 20X8, cash was received in respect of an irrecoverable debt written off in the year ended 30 June 20X8. The amount is included in the GH₵560,600 “cash received from customers” above.

Required
Write up the receivables account, the irrecoverable debts expense account, and allowance for receivables account.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Allowance for receivables, Bad Debts, Cash receipts, Credit Sales, Doubtful debts, Ghana, Irrecoverable debts, Ledger accounts, Trade Receivables, Year-end adjustments
Level: Level 1

Topic: Bad and doubtful debt

Tag (SQ): Trade Receivables

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FR – L2 – Q64 – Revenue from Contracts with Customers

Recalculate AX Ltd's profit for the year ended 31 March 20X9, adjusting for sale or return, depreciation, fraud, and tax.

FM – L2 – Q111 – Management of receivables and payables

Calculate the annual interest cost of offering a 2% settlement discount for payment within 7 days, given a 90-day credit period.

L2 – Q110 – Trade Receivables Management

Calculate the effect of reducing credit period on Entity N's annual profit, considering sales reduction, bad debts, and overdraft costs.

FM – L2 – Q104 – Working Capital Management

Analyze Peak Enterprises Limited's financial statements to determine if it is overtrading and discuss its implications.

FA – L1 – Q91 – Inventory

Calculate closing inventory given sales, purchases, opening inventory, and a 25% mark-up.

FA – L1 – Q51 – Control accounts and account reconciliations

Prepare a corrected trade receivables control account for Tobi and Co for the year ended 31 October 20X9, adjusting for identified errors.

FA – L1 – Q50 – Control accounts and account reconciliations

Prepare a receivables control account for Wako Associates with adjustments for errors identified in the sales ledger as of 31 December 20X9.

FA – L1 – Q35 – Bad and doubtful debt

Write up receivables, irrecoverable debts expense, and allowance accounts for three years with specific and general allowances, including financial position extracts.

FA – L1 – Q34 – Bad and doubtful debt

Write up irrecoverable debt expense and allowance for receivables accounts for three years with specific and general allowances.

FA – L1 – Q33 – Bad and doubtful debt

Write up receivables, irrecoverable debts expense, and allowance for receivables accounts for two years, including recovery of written-off debt.

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FR – L2 – Q64 – Revenue from Contracts with Customers

Recalculate AX Ltd's profit for the year ended 31 March 20X9, adjusting for sale or return, depreciation, fraud, and tax.

You're reporting an error for "FR – L2 – Q64 – Revenue from Contracts with Customers"

FM – L2 – Q111 – Management of receivables and payables

Calculate the annual interest cost of offering a 2% settlement discount for payment within 7 days, given a 90-day credit period.

You're reporting an error for "FM – L2 – Q111 – Management of receivables and payables"

L2 – Q110 – Trade Receivables Management

Calculate the effect of reducing credit period on Entity N's annual profit, considering sales reduction, bad debts, and overdraft costs.

You're reporting an error for "L2 – Q110 – Trade Receivables Management"

FM – L2 – Q104 – Working Capital Management

Analyze Peak Enterprises Limited's financial statements to determine if it is overtrading and discuss its implications.

You're reporting an error for "FM – L2 – Q104 – Working Capital Management"

FA – L1 – Q91 – Inventory

Calculate closing inventory given sales, purchases, opening inventory, and a 25% mark-up.

You're reporting an error for "FA – L1 – Q91 – Inventory"

FA – L1 – Q51 – Control accounts and account reconciliations

Prepare a corrected trade receivables control account for Tobi and Co for the year ended 31 October 20X9, adjusting for identified errors.

You're reporting an error for "FA – L1 – Q51 – Control accounts and account reconciliations"

FA – L1 – Q50 – Control accounts and account reconciliations

Prepare a receivables control account for Wako Associates with adjustments for errors identified in the sales ledger as of 31 December 20X9.

You're reporting an error for "FA – L1 – Q50 – Control accounts and account reconciliations"

FA – L1 – Q35 – Bad and doubtful debt

Write up receivables, irrecoverable debts expense, and allowance accounts for three years with specific and general allowances, including financial position extracts.

You're reporting an error for "FA – L1 – Q35 – Bad and doubtful debt"

FA – L1 – Q34 – Bad and doubtful debt

Write up irrecoverable debt expense and allowance for receivables accounts for three years with specific and general allowances.

You're reporting an error for "FA – L1 – Q34 – Bad and doubtful debt"

FA – L1 – Q33 – Bad and doubtful debt

Write up receivables, irrecoverable debts expense, and allowance for receivables accounts for two years, including recovery of written-off debt.

You're reporting an error for "FA – L1 – Q33 – Bad and doubtful debt"

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