name : chapter 2 bad debts and allowance for doubtful ...proxy.flss.edu.hk/~flssmcwong/s5...

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Chapter 2 Bad debts and allowance for doubtful accounts

2.2 Bad debts (壞帳) Bad debts refer to the accounts receivable (應收帳款) that have been proved to be uncollectible (無法收回). Once a bad debt

arises (出現時), it should be immediately written off (註銷) from the affected debtor’s account (債務人的帳戶). If there is no

specific debtor’s account (特定的債務人的帳戶), we usually use account receivable account or debtor account.

Steps of writing off a bad debt: (註銷壞帳) 1. Write off a bad debt: Dr Bad debt account Cr Debtor’s account

Example 1 If a bad debt of $1,500 is written off from the debtor account on 25 June 2009, the accounting entries should be shown as follows:

Accounts Receivable Ledger Debtor

2009 $ 2009 $ Apr 5 Sales 2,000 June 3 Cash 500 “ 25 Bad Debts 1,500

2,000 2,000

General Ledger Bad Debts

2009 $ 2009 $ June 25 Debtor 1,500

Journal

Date Details Dr Cr

2009 $ $

Jun 25 Bad Debts 1,500 Debtor 1,500

Steps of transferring a bad debt to the profit and loss account: (把壞帳總額轉到損益帳戶) At the end of an accounting period (在會計期末), the total of bad debts would be transferred to the profit and loss account as an

expense (開支). As the bad debts account was closed off at the end of an accounting period, its balance would not appear in the

balance sheet. 2. Transferring the total of bad debts to the profit and loss account at the end of an accounting period: Dr Profit and loss account Cr Bad debts account

Example 2 If a bad debt of $1,500 is transferred from the bad debts account to the profit and loss account at the end of an accounting period, the accounting entries should be shown as follows:

General Ledger Bad Debts

2009 $ 2009 $ June 25 Debtor 1,500 Dec 31 Profit and loss 1,500

Profit and Loss

2009 $ Dec 31 Bad Debts 1,500

Journal

Date Details Dr Cr

2009 $ $ Dec 31 Profit and loss 1,500

Bad Debts 1,500

Income Statement for the year ended 31 December (extract)

$ Expenses: Bad debts 1,500

Name : _________________

Serial No: _____

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Class work 1 1. Suppose Firm A sold goods on credit to the following debtors during the year ended 31 December 2009:

Jan 5 K Lau $5,000 Feb 16 T Yeung $2,400 On 17 May 2009, it was found that K Lau gone bankrupt and could only pay $200 cash. On 20 August 2009, T Yeung also went bankrupt and could not pay anything back. Show how these matters would be recorded in S Lee’s ledgers and journal for the year ended 31 December 2009.

K Lau

2009 $ 2009 $

Jan 5 Sales 5,000 May 17 Cash 200

“ 17 Bad Debts 4,800

5,000 5,000

T Yeung

2009 $ 2009 $

Feb 16 Sales 2,400 Aug 20 Bad Debts 2,400

Bad Debts

2009 $ 2009 $

May 17 K Lau 4,800 Dec 31 Profit and loss 7,200

Aug 20 T Yeung 2,400

7,200 7,200

Profit and Loss

2009 $

Dec 31 Bad Debts 7,200

Journal

Date Details Dr Cr

2009 $ $

May 17 Bad Debts 4,800

K Lau (debtor) 4,800

Aug 17 Bad Debts 2,400

T Yeung (debtor) 2,400

Dec 31 Profit and loss 7,200

Bad Debts 7,200

2. On 1 January 2009, the following balances appeared in the accounts receivable ledger of S Lee’s business:

D Fung $2,000 C Chang $1,200 During the year, the following events took place: Feb 1 S Lee agreed to accept $1,500 cash from D Fung and treated the remaining balance as irrecoverable. Mar 10 C Chang was declared bankrupt. A cash payment of 30% of the outstanding balance was received. Show how these matters would be recorded in S Lee’s ledgers for the year ended 31 December 2009.

D Fung

2009 $ 2009 $

Jan 1 Balance b/f 2,000 Feb 1 Cash 1,500

“ 1 Bad debts 500

2,000 2,000

C Chang

2009 $ 2009 $

Jan 1 Balance b/f 1,200 Mar 10 Cash ($1,200 x30%) 360

“ 10 Bad debts 840

1,200 1,200

Bad Debts

2009 $ 2009 $

Feb 1 D Fung 500 Dec 31 Profit and loss 1,340

Mar 10 C Chang 840

1,340 1,340

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2.3 Bad debts recovered (壞帳收回) Bad debts recovered refer to the debtor to pay back (償還) all or part of the bad debt subsequently.

The bad debt was written off and recovered in the same accounting period (同一會計期內) If the bad debt was written off and recovered in the same accounting period, the required double entries would be simpler. 1. Restating the debt (for the amount paid back) in the debtor’s account (在債務人帳戶中重列償還的款項)

Dr Debtor’s account

Cr Bad debts account

2. Recording the receipt of payment (記錄收款)

Dr Cash book (or Bank/Cash account)

Cr Debtor’s account

In this case, there is no need to open a separate bad debts recovered account (獨立壞帳收回帳戶).

Example 4 Suppose T Yeung paid back $1,000 by cheque on 10 December 2009.

Accounts Receivable Ledger

T Yeung

2009 $ 2009 $ Feb 16 Sales 2,400 Aug 20 Bad debts 2,400 Dec 10 Bad debts 1,000 Dec 10 Bank 1,000

3,400 3,400

General Ledger

Bad Debts

2009 $ 2009 $ May 31 K Lau 4,800 Dec 10 T Yeung 1,000 Aug 20 T Yeung 2,400 “ 31 Profit and loss 6,200

7,200 7,200

Cash Book Date Details Cash Bank Date Details Cash Bank

2009 $ $ 2009 $ $

Dec 10 T Yeung 1,000

Journal

Date Details Dr Cr

2009 $ $

Mar 10 T Yeung (debtor) 1,000 Bad Debts 1,000

24 Bank 1,000 T Yeung (debtor) 1,000

Dec 31 Profit and loss 6,200 Bad Debts 6,200

Class work 2 1. The following is the accounts of K Lau and his bed debts.

K Lau

2009 $ 2009 $


“ 17 Bad debts 4,800

Bad Debts

2009 $

May 17 K Lau 4,800

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If K Lau paid back by cheque in full on 10 December 2009, show the entries in the account.

K Lau

2009 $ 2009 $


Dec 10 Bad Debts 4,800 “ 17 Bad Debts 4,800

Dec 10 Bank 4,800

9,480 9,480

Bad Debts

2009 $ 2009 $

May 17 K Lau 4,800 Dec 10 K Lau 4,800

Journal

Date Details Dr Cr

2009 $ $

Dec 10 K Lau (debtor) 4,800

Bad debts 4,800

Bank 4,800

K Lau (debtor) 4,800

The bad debt was recovered in a later accounting period (壞帳在其後的會計期收回) A separate account would be opened to record the bad debts recovered. At the end of an accounting period, the total of bad debts recovered would be transferred to the profit and loss account (轉到損益帳戶) as other revenue (其他收益).

1. Restating the debt (for the amount paid back) in the debtor’s account (在債務人帳戶中重列償還的款項)

Dr Debtor’s account Cr Bad debts recovered account 2. Recording the receipt of payment (記錄收款)

Dr Cash book (or Bank/Cash account) Cr Debtor’s account 3. Transferring the total of bad debts recovered to the profit and loss account at the end of an accounting period (在會計期

末，把壞帳收回總額轉到損益帳戶)

Dr Bad debts recovered account Cr Profit and loss account

Example 3 Using class work 1 and suppose on 10 March 2010, T Yeung agreed to pay back $1,000. The amount was received two weeks later. This should be recorded as a bad debt recovered in 2010 as follows:

Accounts Receivable Ledger

T Yeung

2009 $ 2009 $ Mar 10 Bad debts recovered 1,000 Mar 24 Bank 1,000

General Ledger

Bad Debts Recovered

2009 $ 2009 $ Dec 31 Profit and loss 1,000 Mar 10 T Yeung 1,000

Cash Book Date Details Cash Bank Date Details Cash Bank

2009 $ $ 2009 $ $

Mar 24 T Yeung 1,000

Profit and Loss

2009 $ 2009 $ Dec 31 Bad Debts Recovered 1,000

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Journal

Date Details Dr Cr

2009 $ $

Mar 10 T Yeung (debtor) 1,000 Bad Debts Recovered 1,000

24 Bank 1,000 T Yeung (debtor) 1,000

Dec 31 Bad Debts Recovered 1,000 Profit and loss 1,000

Income Statement for the year ended 31 March 2010

$ $ Add Other revenues: Bad debts recovered 1,000

Class work 3 1. Mr Robinson, whose debt of $500 had been written off in the previous financial year, paid back by cheque in full on 31

January 2009. Show the entries in debtors and bad debts recovered account if the accounting year ended on 31 March 2009.

Robinson

2009 $ 2009 $

Jan 31 Bad debts recovered 500 Jan 31 Bank 500

Bad Debts Recovered

2009 $ 2009 $

Mar 31 Profit and loss 500 Jan 31 Robinson 500

Journal

Date Details Dr Cr

2009 $ $

Jan 31 Robinson (debtor) 500

Bad Debts Recovered 500

“ 31 Bank 500

Robinson (debtor) 500

Mar 31 Bad Debts Recovered 500

Profit and loss 500

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2. Larry Lee started his trading business on 1 January 2008. The following information relates to his business for the years ended 31 December 2008, 2009 and 2010:

2008 2009 2010 2011 2012

Bad debts to be written off on 31 December $350 $300 $372 $500 $420

Bad debts recovered － $50 $80 $100 $30

Additional information: (i) On 31 December 2008, one of his customers, Teli Tang, became bankrupt. Her outstanding debt of $2,000 had to be written

off. However, this sum was not included in the bad debts to be written off at the year end. (ii) The amount of bad debts recovered in 2009 was received on 30 December 2009. It was related to a debt written off on 31

December 2008. (iii) The amount of bad debts recovered in 2010 was received on 1 October 2010. It was related to a debt written off on 1 March

2010. (iv) The amount of bad debts recovered in 2011 was received on 30 August 2011. It was related to a debt written off on 5 June

2011. (v) The amount of bad debts recovered in 2012 was received on 25 November 2012. It was related to a debt written off on 12

July 2011. Prepare the following for the year 2008, 2009, 2010, 2011 and 2012.

(a) Bad debts account

(b) Bad debts recovered account

Answer

(a)

Bad Debts

2008 $ 2008 $

Dec 31 Accounts receivable 350 Dec 31 Profit and loss 2,350

“ 31 Teli Tang 2,000

2,350 2,350

2009 2009

Dec 31 Accounts receivable 300 Dec 31 Profit and loss 300

2010 2010

Mar 1 Accounts receivable (written off) 80 Oct 1 Accounts receivable (recovered) 80


452 452

2011 2011

Jun 5 Accounts receivable (written off) 100 Aug 30 Accounts receivable (recovered) 100


600 600

2012 2012


(b)

Bad Debts Recovered

2009 $ 2009 $

Dec 31 Profit and loss 50 Dec 30 Accounts receivable (recovered) 50

2012 2012

Dec 31 Profit and loss 30 Nov 25 Accounts receivable (recovered) 30

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2.4 Allowance for doubtful accounts (呆帳準備) The prudence concept (conservatism) (穩健保守概念) requires that an allowance or provision be made for possible expenses or

losses. Such practice helps prevent overstatement (多計) of the net assets or net profit of an entity. Under the prudence concept,

an allowance should be made at the end of an accounting period for those accounts receivable (收帳款) that are likely to become

uncollectible (無法收回).

2.4.1 Estimation of doubtful accounts (呆帳的估計) 1. Specific allowance (特定準備) Each debtor’s account is looked at individually to see whether the debt is likely to become uncollectible. If a debt is likely to become uncollectible, an allowance would then be made, up to the full amount of the debt.

2. General allowance (一般準備) (a) A fixed percentage (固定的比率) is applied to the total of accounts receivable.

(b) Some firms would draw up an ageing schedule (帳齡分析) of accounts receivable and then set different percentage of

doubtful accounts according to the length of time outstanding (欠帳日期).

Ageing Schedule for Doubtful Accounts

Period outstanding Amount of accounts receivable

Estimated percentage of doubtful accounts

Estimated amount of doubtful accounts

$ $ Less than one month 40,000 1% 400

1 month – 2 months 16,000 2% 320

2 months – 3 months 10,000 3% 300

3 months – 1 year 4,000 5% 200

Over 1 year 1,000 10% 100

71,000 1,320

2.4.2 Adjusting entries for doubtful accounts (呆帳的調整分錄) A separate account called allowance for doubtful accounts (allowance for bad debts, allowance for doubtful debts, or allowance for bad and doubtful debts) (呆壞帳準備帳戶) would be opened to record the amount of doubtful accounts at the end of an

accounting period. Allowance for doubtful accounts is actually a contra-asset account (資產對銷帳戶). This is used together with

the account receivable in order to determine the net realizable value (變現淨值) of accounts receivable.

A contra-asset account is a separate account that is paired with a related asset account. The balance of the contra-asset account is deducted (對銷) from the related asset account in the balance sheet. Another example of contra-asset account is the

accumulated depreciation account (provision for depreciation account).

1. When the allowance for doubtful accounts is made for the first time (首次作呆帳準備)

Dr Profit and loss account Cr ‘Allowance for doubtful accounts’ account The net profit for the period would be reduced by the amount of allowance created so the allowance for doubtful accounts in

the first time should be recorded as an expense. Example A specific allowance of $1,200 was to be made for a doubtful debtor’s account.

Profit and loss

2006 $ Dec 31 Allowance for Doubtful Accounts 1,200

Allowance for Doubtful Accounts

2006 $ 2006 $ Dec 31 Balance c/f 1,200 Dec 31 Profit and loss 1,200

Journal

Date Details Dr Cr

2009 $ $

Dec 31 Profit and loss 1,200 Allowance for Doubtful Accounts 1,200

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2. When the allowance for doubtful accounts is made in subsequent periods (其後的會計期所作的呆帳準備)

(a) An increase in the allowance should be recorded as an expense (把增加的呆帳準備視為期內的費用)

Dr Profit and loss account

Cr ‘Allowance for doubtful accounts’ account

The net profit for the period would be reduced by the additional amount of allowance made.

Example An increase in allowance of $200 was to be made for a doubtful debtor’s account.

Profit and loss

2007 $ Dec 31 Allowance for Doubtful Accounts 200


2007 2007 Dec 31 Balance c/f 1,400 Jan 1 Balance b/f 1,200 Dec 31 Profit and loss – Increase in allowance 200

1,400 1,400

Journal

Date Details Dr Cr

2009 $ $

Dec 31 Profit and loss – Increase in allowance 200 Allowance for Doubtful Accounts 200

(b) A decrease in the allowance should be recorded as other revenue (把減少的呆帳準備視為期內的其他收益)

Dr ‘Allowance for doubtful accounts’ account Cr Profit and loss account The net profit for the period would be increased by the amount of allowance reduced.

Example A decrease in allowance of $200 was to be made for a doubtful debtor’s account.


2007 2007 Dec 31 Profit and loss – Decrease in allowance 200 Jan 1 Balance b/f 1,200 Dec 31 Balance c/f 1,000

1,200 1,200

Profit and loss

2007 $ Dec 31 Allowance for Doubtful Accounts 200

Journal

Date Details Dr Cr

2009 $ $

Dec 31 Allowance for Doubtful Accounts 200 Profit and loss – Decrease in allowance 200

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For simplicity, it is assumed that the bad debts were written off as a lump sum from debtors’ account

Example 5 The following table shows the accounts receivable at the ends on 31 December, the bad debts written off and the allowance for

doubtful accounts at a fixed rate of 2% of accounts receivable at the end of each year for the first four years of operation.

Year Year-end accounts receivable (before writing off bad debts)

Bad debts written off

Allowance for doubtful accounts

Increase/Decrease in allowance

2006 $64,230 $4,230 [($64,230 $4,230) x 2%] $1,200 $1,200

2007 $75,100 $5,100 [($75,100 $5,100) x 2%] $1,400 $200

2008 $83,540 $6,040 [($83,540 $6,040) x 2%] $1,550 $150

2009 $71,100 $6,100 [($71,100 $6,100) x 2%] $1,300 ($250)

General Ledger

Bad Debts

2006 $ 2006 $ Dec 31 Accounts receivable/Debtors 4,230 Dec 31 Profit and loss 4,230

2007 2007 Dec 31 Accounts receivable/Debtors 5,100 Dec 31 Profit and loss 5,100






1,400 1,400


1,550 1,550

2009 2009 Dec 31 Profit and loss – Decrease in allowance 250 Jan 1 Balance b/f 1,550

“ 31 Balance c/f 1,300

1,550 1,550

The increase/decrease in allowance for doubtful accounts and the bad debts written off would be shown in the income statement

at the end of each year:

Income Statement for the year ended 31 December (extract) 2006 2007 2008 2009 $ $ $ $ Other revenues: Decrease in allowance for doubtful accounts --- --- --- 250 Expenses: Bad debts 4,230 5,100 6,040 6,100 Increase in allowance for doubtful accounts 1,200 200 150 ---

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The net realizable value of accounts receivable would be shown in the balance sheet at the end of each year.

Balance Sheets as at 31 December (extract) 2006 2007 2008 2009 $ $ $ $ Current assets Accounts receivable 60,000 70,000 77,500 65,000 Less Allowance for doubtful accounts (1,200) (1,400) (1,550) (1,300)

58,800 68,600 75,950 63,700

Class work 4 1. A business started on 1 April 2004 and its financial year ends on 31 March each year. The following table shows the accounts

receivable balance and bad debts written off during the years 2005-2008:

Year ended 31 March

Accounts receivable at the end of the year (before writing off bad debts)

Bad debts written off at year end

Net Accounts receivable

Increase/Decrease in allowance

2005 $70,000 $10,000 $60,000 $3,000

2006 $80,000 $5,000 $75,000 $750

2007 $60,000 $0 $60,000 ($750)

2008 $70,000 $6,000 $64,000 $200

In addition to the writing-off of bad debts, the business makes an allowance for doubtful accounts of 5% on the remaining accounts receivable. Show the entities in the relevant accounts, as well as income statement and the balance sheet for each of the four year.

Bad Debts

2005 $ 2005 $

Dec 31 Accounts receivable 10,000 Dec 31 Profit and loss 10,000

2006 2006


2007 2007


2008 2008



2005 $ 2005 $

Dec 31 Balance c/f 3,000 Dec 31 Profit and loss [($70,000 $10,000) x 5%] 3,000

2006 2006

Dec 31 Balance c/f 3,750 Jan 1 Balance b/f 3,000

Dec 31 Profit and loss – Increase in allowance 750

3,750 [($80,000 $5,000) x 5% $3,000] 3,750

2007 2007

Dec 31 Profit and loss – Decrease in allowance 750 Jan 1 Balance b/f 3,750

Dec 31 Balance c/f 3,000

3,750 3,750

2008 2008

Dec 31 Balance c/f 3,200 Jan 1 Balance b/f 3,000


3,200 3,200

The bad debts written off have already been deducted from the total of accounts receivable shown in the balance sheet

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Income Statement for the year ended 31 March (extract)

2005 2006 2007 2008

$ $ $ $

Other revenues:

Decrease in allowance for doubtful accounts 750

Expenses:

Bad debts $10,000 5,000 6,000

Increase in allowance for doubtful accounts 3,000 750 200

Balance Sheets as at 31 March (extract)

2005 2006 2007 2008

$ $ $ $

Current assets

Accounts receivable 60,000 75,000 60,000 64,000

Less Allowance for doubtful accounts (3,000) (3,750) (3,000) (3,200)

57,000 71,250 57,000 60,800

2. During the year ended 31 December 2010, Bruce Ma, a wholesaler, wrote off the following bad debts: Terry Mo $5,120 written off on 2 March 2010 Ben Chan $500 written off on 18 May 2010 Grace Wong $1,750 written off on 30 August 2010 Horace Pang $1,200 written off on 3 November 2010

On 28 November 2010, a cheque for $300 was received from Ben Chan in settlement of his account. His account had been written off as a bad debt during the year.

The allowance for doubtful accounts had a balance of $1,500 as at 1 January 2010. On 31 December 2010, Bruce decided to increase the allowance for doubtful accounts to 8% of accounts receivable. Accounts receivable as at that date amounted to $70,000.

Draw up the bad debts account, allowance for doubtful accounts account and journal entries of provision of doubtful debts for the year ended 31 December 2010. Show the amounts to be transferred to the profit and loss account.

Bad Debts

2010 $ 2010 $

Mar 2 Terry Mo 5,120 Nov 28 Ben Chan 300

May 18 Ben Chan 500 Dec 31 Profit and loss 8,270

Aug 30 Grace Wong 1,750

Nov 3 Horace Pang 1,200

8,570 8,570


2010 $ 2010 $

Dec 31 Balance c/f ($70,000 x 8%) 5,600 Jan 1 Balance b/f 1,500

Dec 31 Profit and loss – Increase in allowance 4,100

5,600 5,600

2011

Jan 1 Balance b/f 5,600

Journal

Date Details Dr Cr

2010 $ $

Dec 31 Profit and loss – Increase in allowance [($70,000 x 8%)$1,500] 4,100

Allowance for Doubtful Accounts 4,100

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3. Prepare an income statement and a balance sheet after adjusting for accruals, prepayments, bad debts and the allowance for

doubtful accounts.

Trial Balance as at 31 March 2010 Dr Cr $ $ Sales 114,000 Purchases 85,000 Returns 3,500 Inventory 28,000 Discounts 870 Bad debts recovered 360 Wages and salaries 10,600 Rent 12,000 Sundry expenses 680 Office equipment 14,000 Furniture and fittings 13,000 Accounts receivable and payable 6,520 5,710 Allowance for doubtful accounts, 31 March 2009 260 Capital 55,000 Bank 2,900

176,200 176,200

Additional information:

(i) Inventory as at 31 December 2010 was valued at $22,000

(ii) Accrued expenses include: wages $1,000, sundry expenses $200.

(iii) Prepaid rent amounted to $3,000.

(iv) A bad debt of $480 was to be written off.

(v) A specific allowance of $100 was to be made for a doubtful debtor’s account, while a general allowance of 5% was to be

made for the remaining accounts.

Required: Prepare an income statement for the year ended 31 March 2010 and a balance sheet as at that date.

Income Statement for the year ended 31 March 2010

$ $

Sales 114,000

Less Returns inwards (3,500) 110,500

Less Cost of goods sold:

Opening inventory 28,000

Add Purchases 85,000

113,000

Less Closing inventory (i) (22,000) (91,000)

Gross profit 19,500

Add Other revenues:

Discount received 870

Bad debts recovered 360 1,230

20,730

Less Expenses:

Wages and salaries ($10,600 + $1,000) (ii) 11,600

Rent ($12,000 $3,000) (iii) 9,000

Sundry expenses ($680 + $200) (ii) 880

Bad debts (iii) 480

Increase in allowance for doubtful accounts {[$100 + ($6,520 $480 $100) x 5%] $260} (v) 137 (22,097)

Net loss (1,367)

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Balance sheet as at 31 March 2010

$ $ $

Non-current assets

Office equipment 14,000

Furniture and fittings 13,000

27,000

Current assets

Inventory (i) 22,000

Accounts receivable ($6,520 $480) (iv) 6,040

Less Allowance for doubtful accounts ($260 + $137) (v) (397) 5,643

Repaid expenses (iii) 3,000

Bank 2,900

33,543

Less Current liabilities

Accounts payable 5,710

Accrued expenses ($1,000 + $200) (ii) 1,200 (6,910)

Net current assets 26,633

53,633

Capital

Balance as at 1 April 2009 55,000

Less Net loss for the year (1,367)

53,633

4. Mr Ho commenced his business on 1 April 2004. During the two years ended 31 March 2005 and 2006, the following

information relating to debtors was available:

(i) On 31 March 2005, a debt of $6,000 from a customer, Mr Tam, was written off.

(ii) If the company had a balance of $20,000 in the previous for doubtful debts and had debtors amounted to $939,000 on 31

March 2005. It was decided to make a provision for doubtful debts of 3% on debtors as at 31 March 2005.

(iii) On 27 March 2006, $4,000 was received by cheque from Mr Tam in settlement of the debt which had previously been

written off as bad on 31 March 2005.

(iv) On 31 March 2006, debtors amounted to $33,800. It was decided to make a provision for doubtful debts of 2% on debtors as

at 31 March 2006.

Prepare journal entries to record the above items.

Journal

Date Details Dr Cr

2005 $ $

(i) Mar 31 Bad debts 6,000

Mr Tam (debtor) 6,000

(ii) 31 Profit and loss – Increase in provision for doubtful accounts 7,990

Provision for doubtful debts 7,990

(iii) 2006

Mar 27 Mr Tam (debtor) 4,000

Bad debts recovered 4,000

Bank 4,000

Mr Tam (debtor) 4,000

(iv) Mar 31 Provision for doubtful debts 27,314

Profit and loss - decrease in provision [($27,990 – ($33,800 × 2%)] 27,314

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2.5 Allowance for discounts allowed (折扣允許準備) For the sake of prudence, some firm make an allowance for cash discounts allowed to trade debtors at the end of an accounting period. The accounting method for this allowance is similar to that for the allowance for doubtful accounts. The double entries to create an allowance for discounts allowed are: (a) When the allowance for discounts allowed is made for the first time:


Cr Allowance for discounts allowed account

The net profit for the period would be reduced by the amount of allowance created.

(b) When the allowance for discounts allowed is made in subsequent periods:

(i) An increase in the allowance should be recorded as an expense:


Cr Allowance for discounts allowed account

The net profit for the period would be reduced by the additional amount of allowance made.

(ii) A decrease in the allowance should be recorded as other revenue: Dr Allowance for discounts allowed account

Cr Profit and loss account The net profit for the period would be increased by the amount of allowance reduced.

Example 6 The following table shows the accounts receivable, the bad debts written off, the allowance for doubtful accounts at a fixed rate of

2% of accounts receivable and the allowance for discounts allowed at a fixed rate of 5% at the end of the four years.

Year Year-end accounts receivable (before

writing off bad debts)

Bad debts written

off

Allowance for doubtful

accounts Allowance for discounts allowed

Increase/ Decrease in allowance

2006 $64,230 $4,230 $1,200 ($64,230 $4,230 $1,200) x 5% $2,940 $2,940

2007 $75,100 $5,100 $1,400 ($75,100 $5,100 $1,400) x 5% $3,430 $490

2008 $83,540 $6,040 $1,550 ($83,540 $6,040 $1,550) x 5% $3,798 $368

2009 $71,100 $6,100 $1,300 ($71,100 $6,100 $1,300) x 5% $3,185 ($613)

General Ledger

Allowance for Discounts Allowed



3,430 3,430


3,798 3,798

2009 2009 Dec 31 Profit and loss – Decrease in allowance 613 Jan 1 Balance b/f 3,798

“ 31 Balance c/f 3,185

3,798 3,798

The increase/decrease in allowance for discounts allowed, together with the bad debts written off and the increase/decrease in

allowance for doubtful account, would be shown in the income statement at the end of each year.

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Income Statement for the year ended 31 December (extract) 2006 2007 2008 2009 $ $ $ $ Other revenues: Decrease in allowance for doubtful accounts -- -- -- 250 Decrease in allowance for discounts allowed -- -- -- 613 Expenses: Bad debts 4,230 5,100 6,040 6,100 Increase in allowance for doubtful accounts 1,200 200 150 -- Increase in allowance for discounts allowed 2,940 490 368 --

The net realizable value of accounts receivable (i.e., accounts receivable less the bad debts written off and the allowance for

doubtful accounts and discounts allowed) would be shown in the balance sheet at the end of each year.

Balance Sheets as at 31 December (extract)

2006 2007 2008 2009 $ $ $ $ Current assets Accounts receivable 60,000 70,000 77,500 65,000 Less Allowance for doubtful accounts (1,200) (1,400) (1,550) (1,300) Less Allowance for discounts allowed (2,940) (3,430) (3,798) (3,185)

55,860 65,170 72,152 60,515

Class work 5 1 A business commenced operations on 1 April 2005 and its financial year ends on 31 March. The following table shows year-end

accounts receivable balances, bad debts written off, and percentages of allowances for doubtful accounts and discounts

allowed for the years 2006 to 2010.

Year-end accounts Percentage of Percentage of Year ended receivable (after Bad debts allowance for allowance for

31 March writing off bad debts) written off doubtful accounts discounts allowed $ $

2006 30,000 4,000 10% 2% 2007 55,000 3,600 8% 2% 2008 40,000 4,000 12% 2% 2009 30,000 6,000 15% 2%

Show the entries made in the allowance for discounts allowed accounts for each of the five years


2006 $ 2006 $

Mar 31 Balance c/f 540 Mar 31 Profit and loss ($30,000 × 90% × 2%) 540

2007 2006

Mar 31 Balance c/f ($55,000 × 92% × 2%) 1,012 Apr 1 Balance b/f 540

2007

Mar 31 Profit and loss – Increase in allowance 472

1,012 1,012

2008 2007

Mar 31 Profit and loss – Decrease in allowance 308 Apr 1 Balance b/f 1,012

“ 31 Balance c/f ($40,000 × 88% × 2%) 704

1,012 1,012

2009 2008

Mar 31 Profit and loss – Decrease in allowance 194 Apr 1 Balance b/f 704

“ 31 Balance c/f ($30,000 × 85% × 2%) 510

704 704

16

2. On 1 January 2009, a business had the following balances brought forward: allowance for doubtful accounts $672 and

allowance for discount allowed $430. On 31 December 2009, accounts receivable totalled $25,600. The firm decided to write

off $2,960 as bed debts and maintain an allowance for doubtful accounts at 5% and an allowance for discounts allowed at 2.5%.

Show the entries in the relevant ledger accounts and the journal for the year ended 31 December 2009.

Bad Debts

2009 $ 2009 $



2009 $ 2009 $

Dec 31 Balance c/f ($25,600 $2,960) x 5% 1,132 Jan 1 Balance b/f 672


1,132 1,132


2009 $ 2009 $

Dec 31 Balance c/f 538 Jan 1 Balance b/f 430

($25,600 - $2,960 - $1,132) x 2.5% Dec 31 Profit and loss – Increase in allowance 108

538 538

Journal

Date Details Dr Cr

2009 $ $

Dec 31 Bad debts 2,960

Accounts receivable 2,960

31 Profit and loss 2,960

Bad debts 2,960

31 Profit and loss – Increase in allowance 460

Allowance for doubtful accounts 460

31 Profit and loss – Increase in allowance 108

Allowance for discounts allowed 108

Income Statement for the year ended 31 December 2009 (extract)

$

Expenses:

Bad debts 2,960

Increase in allowance for doubtful accounts 460

Increase in allowance for discounts allowed 108

Balance Sheets as at 31 December 2009 (extract)

$

Current assets

Accounts receivable ($25,600 $2,960) 22,640

Less Allowance for doubtful accounts (1,132)

Less Allowance for discounts allowed (538)

20,970

17

3. Larry Lee started his trading business in electronic products on 1 January 2008. The following information relates to his business for the years ended 31 December 2008, 2009 and 2010:

2008 2009 2010 Accounts receivable (before writing off bad debts

and making allowances on 31 December) $28,350 $15,000 $23,372 Percentage of allowance for doubtful accounts 10% 8% 12% Percentage of allowance for discounts allowed 5% 5% 5% Bad debts to be written off on 31 December $350 $300 $372 Bad debts recovered － $50 $80

Additional information: (i) On 31 December 2008, one of his customers, Teli Tang, became bankrupt. Her outstanding debt of $2,000 had to be written

off. However, this sum was not included in the bad debts to be written off at the year end. (ii) As at 31 December 2009, a specific allowance for doubtful accounts $200 was to be made for a customer’s account. This

sum was included in the accounts receivable balance. (iii) The amount of bad debts recovered in 2009 was received on 30 December 2009. It was related to a debt written off on 31

December 2008. (iv) The amount of bad debts recovered in 2010 was received on 1 October 2010. It was related to a debt written off on 1 March

2010.

Prepare the following for the years 2008, 2009 and 2010: (a) Bad debts account (b) Allowance for doubtful accounts account (c) Allowance for discounts allowed account (d) Bad debts recovered account (e) Income statement (extract) (f) Balance sheet (extract) (a)

Bad Debts

2008 $ 2008 $

Dec 31 Accounts receivable 350 Dec 31 Profit and loss 2,350

“ 31 Teli Tang 2,000

2,350 2,350

2009 2009


2010 2010

Mar 1 Accounts receivable 80 Oct 1 Accounts receivable 80


452 452

(b)


2008 $ 2008 $

Dec 31 Balance c/f 2,600 Dec 31 Profit and loss (W1) 2,600

2009 2009

Dec 31 Profit and loss 1,240 Jan 1 Balance b/f 2,600

Dec 31 Balance c/f (W2) 1,360

2,600 2,600

2010 2010

Jan 1 Balance c/f 2,760 Jan 1 Balance b/f 1,360

Dec 31 Profit and loss (W3) 1,400

2,760 2,760

2011


W1: ($28,350 $2,350) x 10% = $2,600

W2: ($15,000 $300 $200) x 8% + $200 = $1,360 (Decrease in allowance)

W3: [($23,372 $372) x 12% $1,360] = $1,400 (Increase in allowance)

18

(c) Allowance for Discounts Allowed

2008 $ 2008 $

Dec 31 Balance c/f 1,170 Dec 31 Profit and loss (W1) 1,170

2009 2009

Dec 31 Profit and loss 503 Jan 1 Balance b/f 1,170

“ 31 Balance c/f (W2) 667

1,170 1,170

2010 2010

Dec 31 Balance c/f (W3) 1,012 Jan 1 Balance b/f 667

Dec 31 Profit and loss 345

1,012 1,012

2011


Working

W1: ($28,350 $2,350 $2,600) x 5% = $1,170

W2: ($15,000 $300 $1,360) x 5% = $667 (Decrease in allowance)

W3: ($23,372 $372 $2,760) x 5% = $1,012 (Increase in allowance)

(d) Bad Debts Recovered

2009 $ 2009 $

Dec 31 Profit and loss 50 Dec 30 Accounts receivable 50

(e) Larry Lee

Income Statement for the year ended 31 December (extract)

2008 2009 2010

$ $ $

Other revenues:

Allowance for doubtful accounts (decrease) － 1,240 －

Allowance for discounts allowed (decrease) － 503 －

Bad debts recovered － 50 －

Expenses:

Bad debts 2,350 300 372

Allowance for doubtful accounts (increase) 2,600 － 1,400

Allowance for discounts allowed (increase) 1,170 － 345

(f) Larry Lee

Balance Sheets as at 31 December (extract)

2008 2009 2010

$ $ $

Current assets

Accounts receivable 26,000 14,700 23,000

Less Allowance for doubtful accounts (2,600) (1,360) (2,760)

Less Allowance for discounts allowed (1,170) (667) (1,012)

22,230 12,673 19,228

Amount of general allowance for doubtful accounts

$($28,350 $2,350) $($15,000 $300)

name : chapter 2 bad debts and allowance for doubtful ...proxy.flss.edu.hk/~flssmcwong/s5...

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