Question

1. The information below is about ACT Fast Enterprise for the year ended 31 December 2020.

Debtors (before bad debt write off)                                            RM240,000

Bad debt write off                                                                     RM5,000

Balance Allowance Doubtful Debt Account on 31 Dec 2019        RM500 (credit)

Based on experience, ACT Fast Enterprise expects that uncollectible debt is 5% from the debtors balance.

Required:

1. Show the journal entries for all relevant transactions above.

2. Prepare the ledger for allowance for doubtful debt showing balance on 31 December 2020.

3. Show extracts of Profit or Loss Account for the year ended 31 December 2020 and extract of the Balance Sheet as of that date.

Answer 1

Answer:

i) Journal entries for all the relevant transactions mentioned in the question:

1) Recognition of the bad debt expense:

Working:

Bad Debts = RM 5,000

Balance available in allowance for doubtful debt account as on 31/12/2019 = RM 500 (Credit balance)

Remaining bad debts (-) allowance for bad debts account shall be

= RM 5,000 - RM 500 = RM 4,500 (Adjusting entry)

So, the normal entry shall be

Bad debts expense A/c Dr RM 500

To Allowance for doubtful a/c RM 500

And for adjustment entries:

Date	Particulars	RM Debit	RM Credit
31/12/2020	Bad Debt Expense A/c Dr	RM 4,500	-
	To Allowance for doubtful debt A/c	-	RM 4,500
	{Being bad debts for the year net off balance in allowance for bad debts account recognised in doubtful debts allowance A/c)

2) Writing off the bad debts incurred during the year:

Date	Particulars	RM Debit	RM Credit
31/12/2020	Allowance for Doubtful debt A/c Dr	RM 4,500	-
	To Debtors (Accounts Receivables) A/c	-	RM 4,500
	{Being Bad debts reduced from the accounts receivable at the year end}	-	-

3) Creating new allowance for Doubtful debts account balance at the end of the year (31/12/2020):

Working:

ACT Fast Enterprise expects that uncollectible debt is 5% from the debtors balance.

So, Computation of debtors balance at the year end:

Particulars	Working	Amount (In RM)
Debtors as on 31/12/2020	-	RM 240,000
Less: Bad Debts During the year	RM 5,000
{-} Allowance for doubtful debts as on 31/12/2019	(RM 500)	(RM 4,500)
= Balance of Debtors after considering the above affects	-	RM 235,500
Percentage of debtors company expected to default for purpose of creating the provision = 5%	RM 235,500 x 5% =	RM 11,775

Journal entry:

Date	Particulars	RM Debit	RM Credit
31/12/2020	Bad Debt Expense A/c Dr (Working notes above)	RM 11,775	-
	To Allowance for doubtful debt A/c	-	RM 11,775
	{Being new allowance for doubtful debts created at the end of the year)	-	-

And it shall also be reduced from the debtors in balance sheet after consideration of bad debts.

4) Allowance of doubtful debts reduced from debtors:

Date	Particulars	RM Debit	RM Credit
31/12/2020	Allowance for doubtful debt A/c	RM 11,775	-
	To Debtors (Accounts Receivable) A/c	-	RM 11,775
	(Being allowance fro doubtful debts reduced from Debtors)	-	-

5) Transfer of bad debts to P/L account:

Date	Particulars	RM Debit	RM Credit
31/12/2020	Profit and loss A/c Dr	RM 4,500	-
	To Bad debt Expense A/c	-	RM 4,500
	{Being bad debts transferred to P/L Account at the year end)	-	-

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ii)  Preperation of ledger for allowance for doubtful debt showing balance on 31 December 2020:

Dr         Cr

Particulars	Amount (In RM)	Particulars	Amount (In RM)
To Bad debts (During the year offsetted against allowance)	RM 500	By Balance B/F	RM 500
To Debtors A/c (Reduced from debtors)	RM 11,775	By Profit & loss A/c (Bad debts) (240,000 x 5%)	RM 11,775
Total	RM 12,275	Total	RM 12,275

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iii) Extracts of Profit or Loss Account for the year ended 31 December 2020 and Extract of the Balance Sheet as of that date:

P/L A/c Extract:

Particulars	Amount (In RM)	Particulars	Amount (In RM)
To Bad debts	RM 4,500	By Net loss	RM 16,275
To Allowance fro doubtful A/c	RM 11,775
Total	RM 16,275	Total	RM 16,275

Balance Sheet Extract:

Liabilities	Amount (In RM)	Assets	Amount (In RM)
		Debtors (Accounts Receivables) = RM 240,000
		Less: Bad debts {5,000 -500 balance} = (RM 4,500)
		Less: Allowance for doubtful debts (240,000 x 5%) = (RM 11,775)
		= Debtors as on 31/12/2020	RM 223,725
	-		-

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