Question

1) A networking company in our country is facing losses of millions of Malaysian
Ringgit (MYR) due to the burden of their bad debts from customers who refused to settle
the payment of their bills. Several notices and summon letter had been sent yet the
customers are still ignoring them. Discuss to the company the way to solve this dilemma

2) Siraj company ventures in teakwood furniture business. It has an annual sales of
RM250,000 per year. All sales were made on credit and the credit terms is 2/15 net 30.
Based on previous experience, 60 per cent of the company’s customers will take the
discount and pay on the 15 th day. In the meantime, the other 40 per cent will make
payments on the 30 th day. Assuming that there are 360 days in a year, calculate the total
accounts receivable for Siraj Company.

Answer 1

1) The network company can take following remedies against errant debtors.

• Try to speak to debtors in person and explain them what difficulty you are facing due to non payment and how badly this can impact their business as well.
• A debt mediation service can be useful, however point to note here is they could be really expensive and it is worth analyzing beforehand whether recovery is more than their fee
• A letter of warning before proceeding for legal course of action. The letter should contain atleast following:
  • Total amount outstanding and number of days for which it is outstanding,  
  • A clear timeframe withing which you are expecting the payments to be cleared e.g.. 14 days
  • Elaborate what consequences non payment will bring to the debtors.
  • Proceedings will also include fees of court, counsel and other legal charges incurred
• Controlled goods agreement - A bailiff company will take control of assets of the debtor and recover the debt by disposing off their assets on behalf of the company.
• Charging order - Similar to mortgage a charging order can be issued to the debtor, and if the payment isn't made within the stipulated time, asset would be disposed of.
• Statutory demand - Formal demand of payment from a debtor that sets out why the demand has been set, when the debt must be paid and the repercussions if the payment is not received. Once the statutory demand has been served, the debtor has 21 days to pay, or 18 days to apply to have it set aside.
• Winding up petition - As a creditor company can always seek winding up of the business if the debtor fails to pay statutory demand. However, this has statutory value attached to it e.g.. creditor of $1000 or above can only opt for winding up petition. Once approved by court, all the assets will be liquidated to recover the dues.

2. Accounts receivable for Siraj Company

Total accounts receivable is 2,50 000 - 3,000 discount  (2,50,000*60*2%)

= 2, 47,000

Since proper dataset (average accounts receivable) is not given receivable turnover ration can't be computed which is essential to compute receivable turnover in days. Therefore accounts receivable in days can't be computed.

Receivable turnover ration = credit sales / average accounts receivable