Question
In: Accounting
On 31 March 2018, the following balances were taken from the trial balance of Isaac Trading...
On 31 March 2018, the following balances were taken from the trial balance of Isaac Trading Limited:
Accounts receivable $400,000
Allowance for doubtful debts $19,500
Net credit sales $5,200,000
Isaac Trading uses the allowance method for accounting for bad debts and identifies the amount on the basis of 5% of net credit sales.
The above accounts receivable includes $6,000 due from XYZ Ltd which was outstanding for more than 150 days. On 31 March 2018, Isaac Trading received notification that XYZ Ltd was insolvent and would be unable to pay their account.
On 31 May 2018, Isaac received notification from the liquidator and $3,200 in settlement of the XYZ’s previous outstanding debt.
Required:
- Prepare the journal entry to write off the debt outstanding by XYZ Ltd on 31 March 2018.
- Prepare the journal entry to adjust the balance for allowance for doubtful debts on the basis of 5% of net credit sales and determine the balance in the allowance for doubtful debts on 1 April 2018.
- Prepare the journal entry to record the settlement received from XYZ Ltd’s liquidator.
The two new accounting interns were discussing the classification of receivables. One commented “Classification of receivables as current or non-current is not that important. The money is received eventually so what is the big deal?”. Discuss the importance of the appropriate classification of receivables and how it could impact on decision making.
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| Isaac Trading Limited | |||
| Answer a | Journal Entry | ||
| Date | Account | Debit $ | Credit $ |
| Mar 31 2018 | Allowance for doubtful accounts | 6,000.00 | |
| XYZ Ltd | 6,000.00 |
| Answer b | |
| Net Sales | 5,200,000.00 |
| Uncollectible % | 5% |
| Uncollectible amount | 260,000.00 |
| Add: Balance of XYZ written off | 6,000.00 |
| Less: Credit balance in allowance for doubtful accounts | 19,500.00 |
| Bad debt expense for 2018 | 246,500.00 |
| Journal Entry | |||
| Date | Account | Debit $ | Credit $ |
| Mar 31 2018 | Bad debt expense | 246,500.00 | |
| Allowance for doubtful accounts | 246,500.00 |
| Balance in Allowance for doubtful accounts on April 1 2018 is $ 260,000. |
| Answer c | Journal Entry | ||
| Date | Account | Debit $ | Credit $ |
| May 31 2018 | XYZ | 3,200.00 | |
| Allowance for doubtful accounts | 3,200.00 | ||
| May 31 2018 | Cash | 3,200.00 | |
| XYZ | 3,200.00 |
| Discuss the importance of the appropriate classification of receivables and how it could impact on decision making. |
| The appropriate classification of receivables is important because it will impact the current ratio and working capital of the company. If the receivables are non current they should be shown separately in Balance Sheet under non current assets. |
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