Question

Al Marina Engineering is in the business of construction. Due to recession the construction industry in going downward. Al Marina is presently having some tenders applied in the past and the company plans to complete these project to meet the recession period. The major item of concern in the business was the cash cycle and this is directly dependent on the collection from the Accounts receivables. Mr Mahmood the Chief Accountant appoints you on 1st May 2019 to manage his business Accounts receivable and to regularly follow up with the accounts receivables for collection of cash as and when due. You have collected the required details from the accounts person relating to receivables. The Accounting record shows projects completed in April was of RO 377250 and the closing balance of Accounts receivable was RO 220,160.

During the month of May you have collected the details of the Accounts receivables. Your finding about the accounts receivable reveals that in one of Account receivable whose project was completed eight months back, have not paid the outstanding bill for RO 2000 The customer has already sold the property and is nowhere traceable. The Management have decided to treat the same as Bad debt and remove the name from receivables. During the current month business completed some project for RO 335,000 and the amount collected from receivables were RO 328,167.

During the Month of June one of your receivable on whom RO 10000 was due on 8th June could not pay the amount on the due date. However he accepted a 30 days note at 8% interest. This was not recorded in the accounts. In June the business completed contract for RO 347000 and the collection from Accounts receivable were RO 348,333. The Direct write off method for recording uncollectable was not suitable for this type of business and so, you have decided to change from direct writ off method to the allowance method for recording uncollectable for doubtful debts. You have decided to make an allowance @ 4% on closing Accounts receivable. In the month of July on the due date the note receivable was dishonoured. In the same month the customer whose name was removed as Bad Debt, paid the amount due.

You are required to record the required Journal entries for the above transactions.

**note: Working notes form part of the answer

Answer 1

Journal Entries : As the accountant appointed on 1st May 2019 he will be responsible for entries for the transaction after 1st May 2019. Further it is assumed that the closing balance of account receivable as on 30th April 2019 of 220,160 includes amount billed for apr-19. Further the detail of billing and collection not provided for July 19 hence the entry for allowance for bad-debt could not be made.

Date	Account	Debit	Credit
31-May-19	Account Receivable	335,000.00
	Sales		335,000.00
	(To Record May-19 Sales)
31-May-19	Cash	328,167.00
	Account Receivable		328,167.00
	(To Record May-19 collection)
31-May-19	Bad Debt	2,000.00
	Account Receivable		2,000.00
	(To record bad-debt)
30-Jun-19	Account Receivable	347,000.00
	Sales		347,000.00
	(To Record Jun-19 Sales)
30-Jun-19	Cash	348,333.00
	Account Receivable		348,333.00
	(To Record Jun-19 collection)
30-Jun-19	Allowance for bad-debt expenses	8,546.40
	Allowance for Bad-debt		8,546.40
	(To create 4% allowance)
30-Jun-19	Notes Receivable	10,000.00
	Account Receivable		10,000.00
	(To record note receivable)
31-Jul-19	Cash	2,000.00
	Bad-debt recovery		2,000.00
	(To record bad-debt recovery)
31-Jul-19	Account Receivable	10,066.67
	Note Receivable		10,000.00
	Interest Income		66.67
	(To record dishonored notes)

Working Notes :

Month	Particular	Amount
April	Closing balance	220,160.00
May	Bad Debt	(2,000.00)
May	Billing	335,000.00
May	Collection	(328,167.00)
Jun	Note receivable	(10,000.00)
Jun	Billing	347,000.00
Jun	Collection	(348,333.00)
Jun	Closing balance	213,660.00
Jun	Bad Debt allowance (4%*213,660)	(8,546.40)
Jun	Net Closing Balance	205,113.60