SK Limited is a merchandising company based in Australia and adopts the allowanc

Question

SK Limited is a merchandising company based in Australia and adopts the allowance method for doubtful accounts. The statement of financial position (balance sheet) at 31 December 2015 showed a credit balance of $58,000 in Allowance for Uncollectible Accounts. During the year ended 31 December 2016, the following transactions occurred:

Required

a) Prepare journal entries to record the transactions during the year ended 31 December 2016. Use a 360-day year when performing interest calculations and round the interest to one decimal place.

b) After reviewing an aged list of accounts receivable at 31 December 2016, the credit manager of the company estimated an amount of $50,000 would become uncollectible. Prepare the allowance for doubtful accounts for the year ended 31 December 2016 (in T-account format).

c) Discuss why the allowance method of accounting for uncollectible accounts is better to match revenue and expense.

Date Transaction 2016 12 January Sold goods to Jeff Wong for $32,000 with one-month credit 20 January Received payment from Alice Lee relating to her 30-day, 9% note for $9,000 that fell due for payment on this date. An accrual had been made for the interest earned up to 31 December 2015. 12 February Accepted a 60-day, 6% note for $32,000 from an existing debtor, Jeff Wong 5 April Wrote off an outstanding debt of $5,000 owed by Andrew Ha who was untraceable 12 April Payment was duly received from Jeff Wong upon the maturity of the note signed on 12 February. 23 May Received payment of $5,000 from Andrew Ha which had been written off on 5 April 30 July Sold goods to Joey Lee by accepting a 90-day, 6% note for $13,000 30 October The note dated 30 July from Joey Lee was dishonoured and returned by the bank. 15 December Wrote off the amount owed by Joey Lee as it was proved to be irrecoverable 18 December Sold goods to Mary Ma by accepting a 60-day, 5% note for $30,000 31 December Recorded the accrued interest on the note from Mary Ma

Explanation / Answer

a.

b.

c. Take a case where a credit sale is made in 2016. Revenue will be recognised in 2016. If the account becomes uncollectible in 2018, if no provision was made in 2016 then entire expense will hit the statement of profit and loss in 2018 against revenues of 2018 which not matches the income and expense properly.

In case of allowance method, a provision is created in 2016 itself, even when the account becomes uncollectible in any subsequent period no material expense will hit the statement of profit and loss in that period. Which is a proper match of income and expense.

Provision may not be accurate but will prevent distortion of profit and loss.

Date Account Debit Credit Jan-12 Accounts receivable 32000 To sales 32000 [sold goods on credit] Jan-20 Bank 9067.5 Interest revenue 45 [9000*9%*20/360] Interest receivable 22.5 [9000*9%*10/360] Note receivable 9000 [Note amount received] Feb-12 Note receivable 32000 Accounts receivable 32000 [Account receivable conversion] Apr-05 Allowance for uncollectible accounts 5000 Accounts receivable 5000 [Account written off] Apr-12 Bank 32320 Interest revenue 320 [32000*6%*60/360] Note receivable 32000 [Note amount received] May-23 Accounts receivable 5000 Allowance for uncollectible accounts 5000 [Uncollectible account written off reinstated] Bank 5000 Accounts receivable 5000 [Account received] Jul-30 Note receivable 13000 Sales 13000 [Goods sold on note] Oct-30 Accounts receivable 13195 Note receivable 13000 Interest revenue 195 [13000*90/360*6%] [Note receivable dishonoured] Dec-15 Allowance for uncollectible accounts 13195 Accounts receivable 13195 [Account written off] Dec-18 Note receivable 30000 Sales 30000 [Goods sold on note] Dec-31 Interest receivable 54.17 [30000*13/360*5%] Interest revenue 54.17 [Interest accrued on note]

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