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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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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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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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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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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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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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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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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:
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Mr. Mala, the proprietor of a small bookshop, has requested you to prepare his accounts. He did not keep complete records of account. From his passbook, notebook, bank statements, and oral information obtained during a meeting with him, you put together the following figures for the year ended December 31, 2015:
| Item | January 1, 2015 (N’000) | December 31, 2015 (N’000) |
|---|---|---|
| Cash in hand | 400 | 890 |
| Bank overdraft | 18,000 | 14,000 |
| Furniture & Fittings | 2,000 | 2,000 |
| Delivery van | 3,600 | 3,600 |
| Inventories | 20,400 | 22,400 |
| Trade receivables | 12,400 | 9,800 |
| Trade payables | 9,120 | 8,400 |
| Bills payables | 2,210 | 2,200 |
| Bills receivables | 3,100 | 3,200 |
During the year, Mr. Mala used part of the inventories for domestic affairs which was agreed at N1,200,000. He drew cash for private expenses at frequent intervals. He estimated his drawing in cash at N2,800,000 for the year.
He also agreed with the following suggestions:
Required:
a. Ascertain Mr. Mala’s bookshop’s profit or loss for the year ended December 31, 2015. (8 Marks)
b. Prepare the statement of financial position of the bookshop at December 31, 2015. (12 Marks)
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Mr. Ken Stevenson keeps single entry books of account. He had the following balances on 1 January, 2013:
| N |
|---|
| Inventory |
| Payables |
| Prepaid insurance |
| Bank overdraft |
| Furniture |
| Motor vehicles |
| Receivables |
| Borrowings |
The following information is extracted from his cash book in respect of the year ended 31 December 2013:
| DR N | CR N |
|---|---|
| Revenue | 279,500 |
| Receipt from trade receivables | 536,400 |
| 815,900 | 815,900 |
He had the following balances on 31 December 2013:
| N |
|---|
| Motor vehicles |
| Inventory |
| Furniture |
| Receivables |
| Payables |
| Borrowings |
Additional information:
(i) Interest on Borrowings to be accrued for at 5% per annum.
(ii) Bad debts of N12,600 are to be written off while 5% allowance is to be made on the net receivables at 31 December, 2013.
(iii) Depreciation is to be charged on the non-current assets at the rate of 10% per annum.
You are required to prepare:
a. Receivables control account (2 Marks)
b. Payables control account (2 Marks)
c. The opening capital (2 Marks)
d. Statement of Profit or Loss for the year ended 31 December 2013 (8 Marks)
e. Statement of Financial Position as at 31 December 2013 (6 Marks)
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The following information relates to Pingway Enterprises as at 31 December 2013:
Allowance for bad debts brought forward N9,750
Accounts receivable N129,250
Bad debt to be written off N9,250
Allowances for bad debts should be adjusted to 5% of the accounts receivable balance.
What amount of allowance for bad debts would be written back in 2013 financial year?
A. N15,750
B. N9,750
C. N6,463
D. N6,000
E. N3,750
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Which of the following statements correctly differentiates bad debt from doubtful debt?
A. Bad debt arises when a customer is in difficulty but might be able to recover from it, while doubtful debt is an amount owed by a customer that the business believes it will never be able to collect.
B. Bad debt is an amount owed by a customer that the business believes it will never be able to collect, while doubtful debt is an amount owed by a customer that the business hopes to collect despite the customer’s difficulties.
C. Bad debt is an amount owed by a customer that the business believes it might be able to collect despite difficulties, while doubtful debt arises when a customer is dishonest and has no intention to pay.
D. Bad debt occurs when a customer disputes whether a contract has been fulfilled or not, while doubtful debt arises when a customer is declared bankrupt or insolvent.
E. Bad debt refers to the dishonesty of a customer, while doubtful debt is an amount owed by a customer that the business believes it might not be able to collect, but still hopes to do so.
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Lukay is a wholesaler who is into the distribution of soft drinks. Lukay has been in operation for some time now, and the following transactions in relation to sales occurred in the first 3 years:
Year 1
Lukay made credit sales of GH¢60,000 and received GH¢45,000 from his credit customers. At the end of the year, she decided to write off Abrantie’s debt of GH¢2,400, made a specific allowance for Keke’s debt totaling GH¢1,050, and created a general allowance of 5% of the remaining trade receivables balance.
Year 2
During the second year of trading, Lukay made credit sales of GH¢90,000 and received cash of GH¢84,000, including GH¢1,200 from Abrantie. He decided to write off Keke’s debt and create a specific allowance against 50% of Yakubu’s total debt of GH¢1,800. He decided that his general allowance should now be 8% of the remaining trade receivables balance.
Year 3
Lukay made credit sales of GH¢150,000 and received cash of GH¢120,000. Additionally, he also received a cheque from Yakubu for GH¢1,800. At the year-end, he decided to create a specific allowance against Atia’s debt of GH¢15,000 and maintained his general allowance at 8%.
Required:
For each of the above years, show the trade receivables account, bad debt expense account, and allowance for doubtful debts account, and the statement of financial position extract as at each year-end. (10 marks)
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Adjaye Ltd has current sales of GH¢1.5 million per year. Cost of sales is 75% of sales and bad debts are 1% of sales. Cost of sales comprises 80% variable costs and 20% fixed costs, while the company’s required rate of return is 12%. Adjaye Ltd currently allows customers 30 days credit, but is considering increasing this to 60 days credit in order to increase sales.
It has been estimated that this change in policy will increase sales by 15% and bad debts will increase from 1% to 4%. It is not expected that the policy change will result in an increase in fixed costs, and creditors and stock will be unchanged.
Required:
Advise whether Adjaye Ltd should introduce the proposed policy. Support your answer with relevant computations.
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a) Nkrumah runs a small business with total annual sales of GHȼ50,000. He has been reviewing the outstanding balances on his customers’ accounts and has provided the following aged analysis of trade receivables as at 31 March 2020.
Nkrumah’s credit policy is payment within 30 days. The provision for bad debt as at 1 April 2019 was GHȼ880. Nkrumah’s policy for overdue and irrecoverable debts is to:
Required:
i) Prepare and balance off the following ledger accounts for Nkrumah for the year ended 31 March 2020:
ii) Prepare the Statement of Profit and Loss extract for irrecoverable debts and provision for bad debts for the year ended 31 March 2020.
(2 marks)
iii) Prepare the Statement of Financial Position extract for receivables as at 31 March 2020.
(2 marks)
b) The admission and retirement of a partner in a firm can only be done if all the existing partners have given consent unless otherwise agreed upon. At the time of admitting or retiring a partner, a new agreement is entered into and the firm is redesigned.
When a partner is admitted or retired in a partnership, some steps (procedures) are followed when accounting for his/her admission or retirement.
Required:
i) Detail the steps required when accounting for admission of a new partner.
(6 marks)
ii) Detail the steps required when accounting for the retirement of a partner.
(4 marks)
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a) Accounting principles and concepts are of fundamental importance in the preparation of financial statements.
Required:
With the aid of relevant examples, outline your understanding on any FOUR (4) of the following concepts/principles: i) Accruals
ii) Going Concern
iii) Historical Cost
iv) Materiality
v) Break up basis
(10 marks)
b) Patricia Ltd prepares accounts to 31 December each year. The following transactions relate to Rent and Rates: i) 31 December 2018 three months’ rent owing amounted to GH¢6,000.
ii) 31 December 2018 two months rates prepaid amounted to GH¢5,250.
iii) During the year 2019, cash paid for rent and rates amounted to GH¢90,000
iv) Rent owing as at 31 December 2019 amounts to GH¢9,000
v) Rates prepaid as at 31 December 2019 amounts to GH¢2,250
Required:
Prepare a combined rent and rates account to disclose the amount that is chargeable to the profit or loss account for the year ended 31 December, 2019.
(4 marks)
c) The following information was extracted from the books of Maanaa and Co.:
| Year | Bad debts written off (GH¢) | Trade Receivables (GH¢) | Allowance for doubtful debt (%) |
|---|---|---|---|
| 1 | 200,000 | 1,200,000 | 10 |
| 2 | 300,000 | 1,800,000 | 5 |
| 3 | 100,000 | 3,000,000 | 5 |
Required:
Prepare the following accounts for the 3 years to determine the amount chargeable to the Profit or Loss account:
i) Bad debts written off account (2 marks)
ii) Allowance for doubtful debt account (4 marks)
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Asomdwee Enterprise is run by a sole trader. The following Trial Balance was prepared from the business accounts on 30th September 2015:
| Account | Dr (GH¢) | Cr (GH¢) |
|---|---|---|
| Capital | 185,280 | |
| Inventory | 24,200 | |
| Sales | 421,450 | |
| Purchases | 167,350 | |
| Purchase returns | 6,040 | |
| Electricity | 2,230 | |
| Discounts allowed | 2,420 | |
| Discounts received | 4,270 | |
| Motor expenses | 1,580 | |
| Drawings | 32,000 | |
| Bank | 24,511 | |
| Salaries | 108,000 | |
| Insurance | 15,400 | |
| Receivables | 110,140 | |
| Irrecoverable debts | 1,420 | |
| Allowance for receivables | 3,153 | |
| Payables | 76,288 | |
| General expenses | 6,780 | |
| 9% Loan (2012-2019) | 150,000 | |
| Loan interest | 12,000 | |
| Land and buildings | 340,000 | |
| Accumulated depreciation – buildings | 26,000 | |
| Equipment | 22,000 | |
| Accumulated depreciation – equipment | 10,300 | |
| Motor vehicles | 26,000 | |
| Accumulated depreciation – motor vehicles | 13,250 | |
| Total | 896,031 | 896,031 |
The following information is also available:
i) Only 10 months’ salaries are shown in the Trial Balance. An equal amount is paid for salaries for each month of the year.
ii) As at 30th September 2015, GH¢3,200 had been prepaid for insurance, whilst GH¢410 was owing for general expenses.
iii) GH¢4,600 had been charged to general expenses for the owner’s private holiday.
iv) As at 30th September 2015, inventory was valued at GH¢22,500.
v) A customer, owing GH¢5,040, has been declared bankrupt. This amount is to be written off in full.
vi) An allowance for receivables is to be maintained at 3% of the remaining receivables.
vii) As at 30th September 2015, the business’s land was valued at GH¢100,000. Land is not depreciated.
viii) Depreciation is to be provided as follows:
Required:
a) Prepare the Income Statement for the year ended 30th September 2015. (8 marks)
b) Prepare the Statement of Financial Position as at 30th September 2015. (6 marks)
c) i) Identify the accounting concept involved in each of the footnotes/items (i), (iii), and (v). (3 marks)
ii) Explain the correct accounting treatment in each case. (3 marks)
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