Question Tag: Bad Debts

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  • 10 Marks

FM – Nov 2024 – L2 – Q5a – Management of Receivables

Evaluate the financial implications of different strategies for managing Abaa LTD's accounts receivable.

Abaa LTD, a company that manufactures and sells electronic appliances, has been facing challenges with its accounts receivable management. Currently, the company allows its customers 60 days of credit. Due to the highly competitive market, Abaa LTD has been experiencing an increasing amount of bad debts and delayed payments, which has adversely affected its cash flow and profitability. To address these issues, the company’s Finance Manager is considering several strategic changes:

  1. Reduction in Credit Period: Reducing the credit period from 60 days to 45 days. It is estimated that this change could reduce sales by 5% due to the stricter credit terms, but it would also decrease the bad debt ratio from 4% to 2% of sales.
  2. Offering Early Payment Discounts: Introducing a 2% discount for customers who pay within 30 days. The company anticipates that 30% of its customers will take advantage of this discount, which would improve cash flow and reduce the average collection period by 15 days.
  3. Engagement of a Factor: The company is also considering engaging a factoring company to manage its receivables. The factor would advance 80% of the invoice value upon the sale of goods at 200 basis points below the company’s cost of capital and charge a 3% fee on all sales. The factor is expected to reduce the bad debt ratio to 1% of sales and further reduce the average collection period by 20 days. Engaging the factor will lead to annual administrative savings of GH¢90,000.

Abaa LTD’s current annual sales are GH¢20 million, and the variable cost of sales is 60% of sales. The company’s cost of capital is 12% per annum.

Required:
Evaluate the financial implications of the following:
i) Reduction in Credit Period
ii) Offering Early Payment Discounts
iii) Engagement of a Factor
iv) Recommend the appropriate method to manage the credit sales

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  • 1 Marks

FA – May 2012 – L1 – SA – Q30 – Accounting Treatment for Bad and Doubtful Debts

Identifying how a decrease in provision for doubtful debts impacts the income statement and provision account.

A decrease in provision for doubtful debts is ……………………. to the income statement and ……………………….. to the provision for doubtful debt account.

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  • 1 Marks

FA – May 2014 – L1 – SA – Q8 – Double-Entry Accounting Principles

Determines the corresponding credit entry for a bad debt write-off.

Where a specific trade receivable is written off as bad, the corresponding credit is expected to be in
A. Purchases Account
B. Bad Debts Account
C. Allowance for Doubtful Debts Account
D. Sales Account
E. Receivables Ledger Control Account

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  • 12 Marks

MI – Nov 2015 – L1 – SB – Q6b – Accounting for Cost Elements

Calculates cash receipts expected over three months, considering credit sales terms and bad debts.

The following information was extracted from the books of LAHA Limited:

Product P (units) Product Q (units)
November 1,500
December 2,000
January 1,000
February 2,000
March 3,000

Product P is sold for ₦200 per unit, and Product Q for ₦300 per unit. All sales are on credit. 20% of total sales are received in the month of sale, 40% in the following month, and the remaining balance (excluding bad debts) is received at the end of the second month. Bad debts are 2% of total sales and are written off at the end of the second month following sale.

Required:
Calculate the cash receipts expected in January, February, and March. (12 Marks)

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  • 1 Marks

FA – Nov 2014 – L1 – SA – Q6 – Accounting Treatment for Bad and Doubtful Debts

Identifying where the bad debts account is closed at the year-end in financial statements.

In preparing financial statements, the bad debts account is closed by a transfer to:

A. Statement of financial position
B. Provision for bad debt account
C. Statement of profit or loss
D. Trading account
E. Statement of cash flows

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  • 1 Marks

FA – May 2021 – L1 – SA – Q6 – Accounting Treatment for Bad and Doubtful Debts

Impact of a reduction in allowance for doubtful receivables on profit.

Which of the following is the effect of a reduction in allowances for doubtful receivables?
A. A reduction in gross profit
B. A reduction in profit for the period
C. A reduction in cash balance
D. Increase in profit for the period
E. Increase in cash balance

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  • 20 Marks

FA – May 2023 – L1 – SB – Q1 – Recording Financial Transactions, Bad and Doubtful Debts

Preparation and balancing of Trade Receivables, Bad Debts, and Allowances for Doubtful Debts accounts.

It was discovered on December 31, 2016, Baruwa Limited had a receivables balance of N15,000,000. It was discovered, before the preparation of the final accounts, that a customer owing N3,000,000 would not be able to settle such debts. It is the policy of Baruwa Limited to make allowances for doubtful receivables of 5% of all outstanding receivables at the end of each accounting period.

During the accounting year of 2017, the company made total credit sales of N19,600,000, out of which an amount of N11,000,000 was collected from customers. A court declared a customer who owes the company an amount of N1,700,000 bankrupt in August 2017. The company recorded some cheques amounting to N3,500,000 that were dishonoured.

The company recorded N30,000,000 and N17,000,000 in connection with cash and credit sales, respectively, in the year 2018. The company received N25,000,000 from trade receivables and also showed N13,400,000 as the outstanding balance on the sales ledger account. A cheque was received from the customer whose debt was written off in 2016 in full settlement of his debt.

Required:

Prepare and balance the following accounts:

a. Trade Receivables Account (8 Marks)

b. Bad Debts Account (3 Marks)

c. Allowances for Doubtful Receivables Account (3 Marks)

d. Prepare an extract of the Statement of Financial Position as at December 31, 2018, showing the relevant balances. (6 Marks)

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  • 8 Marks

FA – May 2017 – L1 – SB – Q6c – Accounting Treatment for Bad and Doubtful Debts

Prepare the bad debts and allowance for doubtful receivables ledger accounts for Funke Limited.

Funke Limited’s management, based on the prudence principle, evaluated its trade receivables accounts over a period of three years ending on December 31 each year. The following were the extracts from the records of the outcome of the evaluation:

Year Trade Receivables (₦) Bad Debts (₦) Allowance for Doubtful Receivables (%)
2014 654,000 24,000 2%
2015 745,000 18,000 2%
2016 585,000 22,000 2%

The value stated for trade receivables was net of the bad debts but before the allowance for bad debts. There was no allowance for bad debt before 2014.

Required: Prepare the ledger accounts for Bad Debts and Allowance for Doubtful Receivables.

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  • 1 Marks

FA – May 2017 – L1 – SA – Q5 – Accounting Treatment for Bad and Doubtful Debts

Double-entry for cash received on previously written-off debt.

The double entry to record cash received in a subsequent year on debt which had been written off as bad in a previous period is

A. Debit trade receivables account, Credit cash account
B. Debit bad and doubtful debts expense account, Credit cash account
C. Debit cash account, Credit bad debt expense account
D. Debit trade receivables account, Credit bad debt expense account
E. Debit cash account, Credit profit or loss account

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  • 1 Marks

FA – Nov 2019 – L1 – SA – Q7 Accounting Treatment for Bad and Doubtful Debts-

Calculate the allowance for receivables recognized in the statement of profit or loss.

What is the amount of allowance recognized in the statement of profit or loss?

The following is an information extract from the books of accounts of Walling Parking Enterprises, a sole trader:

  • Trade receivables balance for the period: N1,300,000
  • The chance of collecting 2% of the receivables figure is remote.
  • It is virtually certain that 95% of the balance of the receivables is collectable.

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  • 10 Marks

FM – Nov 2024 – L2 – Q5a – Management of Receivables

Evaluate the financial implications of different strategies for managing Abaa LTD's accounts receivable.

Abaa LTD, a company that manufactures and sells electronic appliances, has been facing challenges with its accounts receivable management. Currently, the company allows its customers 60 days of credit. Due to the highly competitive market, Abaa LTD has been experiencing an increasing amount of bad debts and delayed payments, which has adversely affected its cash flow and profitability. To address these issues, the company’s Finance Manager is considering several strategic changes:

  1. Reduction in Credit Period: Reducing the credit period from 60 days to 45 days. It is estimated that this change could reduce sales by 5% due to the stricter credit terms, but it would also decrease the bad debt ratio from 4% to 2% of sales.
  2. Offering Early Payment Discounts: Introducing a 2% discount for customers who pay within 30 days. The company anticipates that 30% of its customers will take advantage of this discount, which would improve cash flow and reduce the average collection period by 15 days.
  3. Engagement of a Factor: The company is also considering engaging a factoring company to manage its receivables. The factor would advance 80% of the invoice value upon the sale of goods at 200 basis points below the company’s cost of capital and charge a 3% fee on all sales. The factor is expected to reduce the bad debt ratio to 1% of sales and further reduce the average collection period by 20 days. Engaging the factor will lead to annual administrative savings of GH¢90,000.

Abaa LTD’s current annual sales are GH¢20 million, and the variable cost of sales is 60% of sales. The company’s cost of capital is 12% per annum.

Required:
Evaluate the financial implications of the following:
i) Reduction in Credit Period
ii) Offering Early Payment Discounts
iii) Engagement of a Factor
iv) Recommend the appropriate method to manage the credit sales

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  • 1 Marks

FA – May 2012 – L1 – SA – Q30 – Accounting Treatment for Bad and Doubtful Debts

Identifying how a decrease in provision for doubtful debts impacts the income statement and provision account.

A decrease in provision for doubtful debts is ……………………. to the income statement and ……………………….. to the provision for doubtful debt account.

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  • 1 Marks

FA – May 2014 – L1 – SA – Q8 – Double-Entry Accounting Principles

Determines the corresponding credit entry for a bad debt write-off.

Where a specific trade receivable is written off as bad, the corresponding credit is expected to be in
A. Purchases Account
B. Bad Debts Account
C. Allowance for Doubtful Debts Account
D. Sales Account
E. Receivables Ledger Control Account

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  • 12 Marks

MI – Nov 2015 – L1 – SB – Q6b – Accounting for Cost Elements

Calculates cash receipts expected over three months, considering credit sales terms and bad debts.

The following information was extracted from the books of LAHA Limited:

Product P (units) Product Q (units)
November 1,500
December 2,000
January 1,000
February 2,000
March 3,000

Product P is sold for ₦200 per unit, and Product Q for ₦300 per unit. All sales are on credit. 20% of total sales are received in the month of sale, 40% in the following month, and the remaining balance (excluding bad debts) is received at the end of the second month. Bad debts are 2% of total sales and are written off at the end of the second month following sale.

Required:
Calculate the cash receipts expected in January, February, and March. (12 Marks)

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  • 1 Marks

FA – Nov 2014 – L1 – SA – Q6 – Accounting Treatment for Bad and Doubtful Debts

Identifying where the bad debts account is closed at the year-end in financial statements.

In preparing financial statements, the bad debts account is closed by a transfer to:

A. Statement of financial position
B. Provision for bad debt account
C. Statement of profit or loss
D. Trading account
E. Statement of cash flows

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  • 1 Marks

FA – May 2021 – L1 – SA – Q6 – Accounting Treatment for Bad and Doubtful Debts

Impact of a reduction in allowance for doubtful receivables on profit.

Which of the following is the effect of a reduction in allowances for doubtful receivables?
A. A reduction in gross profit
B. A reduction in profit for the period
C. A reduction in cash balance
D. Increase in profit for the period
E. Increase in cash balance

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  • 20 Marks

FA – May 2023 – L1 – SB – Q1 – Recording Financial Transactions, Bad and Doubtful Debts

Preparation and balancing of Trade Receivables, Bad Debts, and Allowances for Doubtful Debts accounts.

It was discovered on December 31, 2016, Baruwa Limited had a receivables balance of N15,000,000. It was discovered, before the preparation of the final accounts, that a customer owing N3,000,000 would not be able to settle such debts. It is the policy of Baruwa Limited to make allowances for doubtful receivables of 5% of all outstanding receivables at the end of each accounting period.

During the accounting year of 2017, the company made total credit sales of N19,600,000, out of which an amount of N11,000,000 was collected from customers. A court declared a customer who owes the company an amount of N1,700,000 bankrupt in August 2017. The company recorded some cheques amounting to N3,500,000 that were dishonoured.

The company recorded N30,000,000 and N17,000,000 in connection with cash and credit sales, respectively, in the year 2018. The company received N25,000,000 from trade receivables and also showed N13,400,000 as the outstanding balance on the sales ledger account. A cheque was received from the customer whose debt was written off in 2016 in full settlement of his debt.

Required:

Prepare and balance the following accounts:

a. Trade Receivables Account (8 Marks)

b. Bad Debts Account (3 Marks)

c. Allowances for Doubtful Receivables Account (3 Marks)

d. Prepare an extract of the Statement of Financial Position as at December 31, 2018, showing the relevant balances. (6 Marks)

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  • 8 Marks

FA – May 2017 – L1 – SB – Q6c – Accounting Treatment for Bad and Doubtful Debts

Prepare the bad debts and allowance for doubtful receivables ledger accounts for Funke Limited.

Funke Limited’s management, based on the prudence principle, evaluated its trade receivables accounts over a period of three years ending on December 31 each year. The following were the extracts from the records of the outcome of the evaluation:

Year Trade Receivables (₦) Bad Debts (₦) Allowance for Doubtful Receivables (%)
2014 654,000 24,000 2%
2015 745,000 18,000 2%
2016 585,000 22,000 2%

The value stated for trade receivables was net of the bad debts but before the allowance for bad debts. There was no allowance for bad debt before 2014.

Required: Prepare the ledger accounts for Bad Debts and Allowance for Doubtful Receivables.

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  • 1 Marks

FA – May 2017 – L1 – SA – Q5 – Accounting Treatment for Bad and Doubtful Debts

Double-entry for cash received on previously written-off debt.

The double entry to record cash received in a subsequent year on debt which had been written off as bad in a previous period is

A. Debit trade receivables account, Credit cash account
B. Debit bad and doubtful debts expense account, Credit cash account
C. Debit cash account, Credit bad debt expense account
D. Debit trade receivables account, Credit bad debt expense account
E. Debit cash account, Credit profit or loss account

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  • 1 Marks

FA – Nov 2019 – L1 – SA – Q7 Accounting Treatment for Bad and Doubtful Debts-

Calculate the allowance for receivables recognized in the statement of profit or loss.

What is the amount of allowance recognized in the statement of profit or loss?

The following is an information extract from the books of accounts of Walling Parking Enterprises, a sole trader:

  • Trade receivables balance for the period: N1,300,000
  • The chance of collecting 2% of the receivables figure is remote.
  • It is virtually certain that 95% of the balance of the receivables is collectable.

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