TABLE OF CONTENT

TASK 1 1
(a) 2
(b) 2
(c) 2
(d) 3
TASK 2 3
(a) 4
(b) 4
(c) 5
TASK 3 5
(a) 6
REFERENCES 9

TASK 1
Prince Incorporated., a wholesaler of hardware where the sales staff makes sales without worrying about the credit worthiness of the customers. You have been engaged as a trainer to condDissertation is provide by Custom Thesisuct ‘the management of debtors’ for the company’s inexperience accounting staff. Explains the materials you will prepare so as to conduct an effective training programme.

(a) Nature of trade debtors.
Trade debtors are buyers who purchase from the company’s goods on credit.

(b) Nature, causes and the accounting treatment for bad debts.
If a firm finds that it is impossible to collect a debt, then that debt should be immediately written off as a bad debt. Bad debt is a debt which the debtor will not be able to pay.

Causes: The debtor is suffering a loss in his/her business, or even has gone bankrupt and cannot pay off the debt.

The steps for recording bad debts are as follows:
Step 1: To write off the debt from the debtor’s account.
Dr Bad debts account
Cr Debtor’s account
Step 2: To close the bad debts account at the end of the year.
Dr Profit and loss account
Cr Bad debts account

(c) The various controls the firm can use to reduce the risk of bad debts.
● Make a reduction in the credit limit on high-risk customers.
The company can lower the credit limit of the customers, when payments are late or if the customers have too much other debt.

● Correct the credit policy.
A company may have to correct or adjust credit and collection policy, if it is worrying about it has too many bad debts. By tweaking or adjusting certain things, try to makes it more difficult for customers to get approved when their economy is experiencing a recession.
● Provide new arrangements.
If you Dissertation is provide by Custom Thesisoffer unconventional repayment plans to the customers who are experiencing hardships, they may consider paying a past debt due. E.g. reducing the interest rate and only requiring the debtor to make a payment every other month until they get rid of the crisis.#p#分頁標題#e#

● Communicate clearly the outcome if an account becomes a bad debt.
Send a letter to explain clearly the possible outcome when an account becomes a bad debt if payment arrangements are made and the customer does not stick to them. Once the bad debts are forwarded to a collection agency, this information will be reported on the customer's credit file for seven years. When a court is petitioned and a judgment is received, the collection agency can proceed with a wage garnishment or bank garnishment. And the real estate property of the customer will possibly be detained.

● Follow up earlier with customers.
The longer a debt goes without a payment the easier it becomes a bad debt. Mail a letter to remind the customer to make their payment as soon as he misses a payment

(d) The nature of and the accounting for provision for doubtful debts.
At the end of each accounting year, the account of debtors should be reviewed and some accounts which are found to be definitely uncollectable should be written off to a bad debts account. However, some of the debtors’ accounts may not be definitely uncollectable, but may be doubtful. In such case, we have to make a provision for bad debts (or provision for doubtful debts). Provision for bad debts shows the estimated amount of debts which may be uncollectable at the balance sheet date.

When the amount of the provision to be made has been decided, then the accounting entries needed for the provision are:
The year in which provision is first made:
Dr Profit and loss account
Cr Provision for bad debts account
With the account of provision
Note that provision for bad debts represents a possible loss from the outstanding debtors’ balance and thus should be charged to the profit and loss account as an expense.

TASK 2

An aging of the company’s debtors on 31 December 2009 and a historical analysis of the percentage of provision for doubtful debts in each age category are as follows:

Age Interval Amount owing % of Provision required
Not past due $425,000 2%
1 to 30 days $122,000 5%
31 to 60 days $65,000 10%
61 to 90 days $25,000 15%
91 to 180 days $8,000 50%
Over 180 days past due $3,000 90%
$648,000

(a) Calculate the amount of provision for doubtful debts as at 31 December 2009.
Assume that the provision for doubtful debt account had a balance of $9,000 as at 1st January 2009.

Total amount ofDissertation is provide by Custom Thesisprovision for doubtful debts = ＄425,000 × 2% + ＄122,000 × 5% + ＄65,000 × 10% + ＄25,000 × 15% + ＄8,000 × 50% + ＄3000 × 90%#p#分頁標題#e#
= ＄8,500 + ＄6,100 + ＄6,500 + ＄3,750 + ＄4,000 + ＄2,700
= ＄31,550

Provision for doubtful debts Account
＄ ＄
2009 2009
Dec 31 Balance c/d 31,550 Jan 1 Balance b/d 9,000
______ Dec 31 Profit & Loss 22,550
31,550 31,550
2010
Jan 1 Balance b/d 31,550
 

(b) Journalise the adjusting entry for provision for doubtful debts as at 31 December 2009. Show how the figures will appear in the financial statements.

General journal
＄ ＄
Profit & Loss 22,550
Provision for doubtful debts 22,550


 

(c) Explain with illustration which other method can be used to estimate provision for doubtful debts.
Specific provision
Look into each debt, and estimate which one may be a bad debt.
The meaning of Specific Provision for doubtful debts is:
- not considered sufficiently bad as yet to written off
- debtor’s balance exist high degree of uncertainty for not able to recover
This provision is created based on reviewing the INDIVIDUAL trade debtor who are owing to the firm.

Illustration:
Say, there are 200 debtors owning, management at certain interval will review individually trade debtors and know that only 20 accounts needs to be selected for doubtful debt. The rest can be surely collected.

Say, at Year End Trade Debtors Balance is ＄9,000,000 based on reviewing the individual trade debtor who is owing to the firm, Management believe ＄50,000 should be written off.
Debit: Provision for Doubtful Debt (income Statement) ＄50,000
Credit: Provision for Doubtful Debt (Balance Sheet) ＄50,000
Being ＄50,000 Specific provision created based on reviewing the individual trade debtor who is owing to the firm

TASK 3

The company had the following debtors before deducting bad debts at the end of the past three years.

Year ended 31 DecemberDissertation is provide by Custom Thesis

 Debtors before bad debts Bad debts
2006 8,000 --
2007 7,300 300
2008 9,400 400
 

It is the practice of the firm to provide 5% of debtors at the end of the year as doubtful debts.
Required:

(a) Show the entries for each of the year in the following accounts:
(i) Debtors Account

Debtors Account
＄ ＄
2006
Dec 31 Balance b/d 8,000



 

Debtors Account
＄ ＄
2007 2007
Dec 31 Balance b/d 7,300 Dec 31 Bad debts 300
_____ Dec 31 Balance c/d 7,000
7,300 7,300
2008
Jan 1 Balance b/d 7,000
 

Debtors Account
＄ ＄
2007 2007
Dec 31 Balance b/d 9,400 Dec 31 Bad debts 400
_____ Dec 31 Balance c/d 9,000
9,400 9,400
2008
Jan 1 Balance b/d 9,000
 

(ii) Bad debts Account
Bad debts Account
＄ ＄
2007 2007
Dec 31 Debtors 300 Dec 31 Profit & Loss 300


 

Bad debts Account
＄ ＄
2008 2008
Dec 31 Debtors 400 Dec 31 Profit & Loss 400


 

(iii) Provision for doubtful debts Account

Provision for doubtful debts Account
＄ ＄
2006 2006
Dec 31 Balance c/d 400 Jan 31 Balance b/d 0
_____ Dec 31 Profit & Loss 400
400 400
2007 2007
Dec 31 Profit & Loss 50 Jan 1 Balance b/d 400
Dec 31 Balance c/d 350 ____
400 400
2008 2008
Dec 31 Balance c/d 450 Jan 31 Balance b/d 350
___ Dec 31 Profit & Loss 100
450 450
2009
Jan 1 Balance b/d 450

REFERENCES
Frank Wood, Mr Eric Lo Chi Chung, Dr Pak Cho Kan and Mrs Lindy Yau Wan Wah, 2003. Principles of Accounts for Hong Kong, 6th ed, Sydney: McGraw-Hill.
Gregory R. Mostyn, 2007. Basic Dissertation is provide by Custom Thesisaccounting concepts, principles and procedures. Milpitas, CA: Worthy & James Pub pp 45-97.
A. V. Dean, 1984. Basic accounting and record keeping, Sydney: McGraw-Hill.
How to Reduce the Risk of Bad Debts, Available at: http://www.ehow.com/how_6086057_reduce-risk-bad-debts.html
Different Methods of Creating Provision for doubtful debts. Available at: http://basiccollegeaccounting.com/different-methods-of-creating-provision-for-doubtful-debts/”