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In: Accounting

On 1 July 2020 Tran’s Hardware Pty Ltd had an accounts receivable ledger balance of $75,000...

On 1 July 2020 Tran’s Hardware Pty Ltd had an accounts receivable ledger balance of $75,000 debit and a credit balance in the allowance for doubtful debts ledger account of $15,000.

On 3 July Tran’s was contacted by Nails and Hammers Pty Ltd to notify that the business had been declared bankrupt and that they would not be able to pay the $5,500 owing to Tran’s Hardware from a previous credit sale made to them in June 2020.

The business received notification from Panda House Pty Ltd on 25 July 2020 that, $1,100 (GST inclusive) that had previously been written off as uncollectible in May 2020 would be paid in full in August 2020.

On 31 July 2020 Management reassessed the allowance for doubtful debts at year end and decided on a closing balance of $12,200 (GST exclusive) under the ageing of receivables approach.

Required:

  1. Prepare journal entries for each of the above events. Narrations are not required.

General Journal

Date

Account

Debit

Credit

                                                                      

b. The owners have approached you, the businesses accountant and asked if, for the financial year ending 30 June 2021, you would change to the direct write-off method for recording bad debts. How does changing the measurement of bad debts from the allowance method to the direct write-off method influence the usefulness of financial information? Ensure you reference the fundamental qualitative characteristics of information prescribed by the Conceptual Framework for Financial Reporting in your response.

Solutions

Expert Solution

b. There are 2 ways to account for bad debt. The fundamental difference between the 2 methods is in timing difference of bad debts expense recognition and accounting principles applied for accounting bad debt expense. Hence both methods are not same and the recommended method for accounting is allowance method. A direct method of write off is not in accordance with conceptual framework for financial reporting and change to direct method of write off is not recommended compared to allowance method.

The Direct method is not in accordance with accrual concept and matching concept since bad debts are not accrued for each period and bad debts of different period can be charged to sales of different period.

Allowance method is in accordance with accrual concept and matching concept since bad debts are accrued in the period in which sales take place and bad debts expense match the sales recognised in the period.

ekkarill92 answered 2 years ago
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