Question

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) Estimated Bad Debts expense are

$21,048.00

Working
	(A)	(B)	(A) x (B)
	Balance	% estimated uncollectable	Bad Debts
Accounts not yet due	$1,75,600.00	0.5	$878.00
Accounts overdue:       1–30 days	$61,000.00	2	$1,220.00
31–60 days	$44,000.00	10	$4,400.00
61–120 days	$25,400.00	25	$6,350.00
121 days and over	$20,500.00	40	$8,200.00
Total	$3,26,500.00		$21,048.00

(b) General Entry to record the Bad debt Expense

Bad Debts Expense	Debit	21048
Provision for Bad Doubtful Debt	Credit		21048

(C) Direct Write off Accounting Entry.

Bad Debts Expense	Dr	2750
Account Receviable	Cr		2750

(d) Matching principle deals with recording of income and expense related to same financial year. In case of Allowance method, related expense are recorded in the same year of sale/revenue by making provision or allowance in the books while in case of Direct Write off method related expense are recorded in the year in which these are actually incurred without considering the year in which the related income/revneue was booked.