Question

QUESTION TWO

Flemington Bikes sells racing bikes on credit. It uses the ageing of accounts receivable method for estimating bad debts. On 30 June 2020, the Allowance for Doubtful Debts account had a balance of $8,800 CR before any adjustments. An ageing analysis of the account receivable balance as at 30 June 2020 is provided below. The uncollectable percentages for each age group are based on past experience and are shown next to the respective aged balances. Flemington Bikes is registered for goods and services tax (GST).

	Balance		% estimated uncollectable
Accounts not yet due Accounts overdue:       1–30 days 31–60 days 61–120 days    121 days and over	$175,600 61,000 44,000 25,400   20,500		0.5 2 10 25 40
	$326 500

REQUIRED:

1. Using the ageing of accounts receivable method, calculate the estimated bad debts expense from the above information. Show all workings. (Hint: The company is registered for GST).

2. Prepare the general journal entry to record bad debts expense.

(Narrations are not required).   

3. Assume that Flemington Bikes uses the direct write-off method to account for bad debts. Prepare the general journal entry to write-off an account receivable from Bill Murray for $2,750 (GST inclusive) on 31 August 2020.

4. Explain how the direct write-off method differs from the allowance method when recording bad debts expense and why the direct write-off method violates the matching principle. (word limit 150).

Answer 1

a]	The amount of estimated uncollectable would be:
	Category	Balance	% Estimated Uncollectable	Estimated Uncollectable Amount
	Accounts not yet due	$             175,600	0.5	$                     878
	Accounts overdue:			$                         -
	1-30 days	$               61,000	2.0	$                 1,220
	31-60 days	$               44,000	10.0	$                 4,400
	61-120 days	$               25,400	25.0	$                 6,350
	121 days and over	$               20,500	40.0	$                 8,200
	Total	$             326,500		$               21,048
	Estimated bad debts expense = 21048-8800 =	$               12,248
b]	JOURNAL ENTRY:
	Bad debts expense	$               12,248
	Allowance for doubtful debts account		$               12,248
c]	Bad debts expense	$                  2,750
	Accounts receivable		$                 2,750
d]	Under the direct write-off method, bad debt expense is recorded whenever
	an AR is considered as not recoverable. It is not done on an overall basis as an
	estimate at the end of each period. Hence, there would be no provision in the
	name of 'allowance for doubtful debts account' and AR is reported as the total
	of outstanding AR.
	The above procedure would mean that bad debts would be recorded not
	necessarily in the same period in which the sale occurs, as the write off may
	be done in a subsequent period. It will be a violation of the matching
	principle.
	As against the direct write-off method, the allowance method attempts to
	recognize bad debts expense in the same period in which the sales occur. It
	is done by estimating the likely bad debts, as done in the question given, at
	the end of each period. Such a procedure will enable the matching of expenses
	and revenues in the same period. Write-offs are done to the debit of the
	allowance account.