4.4. Irrecoverable debts and provision for doubtful debts
A subsection of Accounting, 7707, through 4. Accounting procedures
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NT started in business on 1 September 2020. All sales are on credit and payment is required from customers within 25 days. On 5 May 2021, LW a trade receivable was declared bankrupt and a debt of $600 was written off as irrecoverable at that date. REQUIRED Prepare a journal entry to write off the amount owed by LW. A narrative is required. NT General Journal Date Details Debit $ Credit $ In addition to the irrecoverable debt of LW, other irrecoverable debts of $4100 were written off during the year ended 31 August 2021. Trade receivables at 31 August 2021 were $91 500 and NT decided to create a provision for doubtful debts of 5% of trade receivables. REQUIRED Prepare an extract from the expenses section of NT’s income statement for the year ended 31 August 2021. NT Extract from income statement for the year ended 31 August 2021 Prepare an extract from the assets section of NT’s statement of financial position at 31 August 2021. NT Extract from statement of financial position at 31 August 2021 During the financial year ended 31 August 2022, PB a trade receivable who owed $7000 had been declared bankrupt. On 17 July 2022, NT received payment of $2500 by cheque in final settlement of the debt. The remainder of the debt was written off as irrecoverable. Other irrecoverable debts of $8400 were written off at 31 August 2022. The remaining trade receivables at 31 August 2022 were $110 000 and NT decided to maintain the provision for doubtful debts at 5% of trade receivables. REQUIRED Prepare the following ledger accounts for the year ended 31 August 2022. Bring down the balance on 1 September 2022, where appropriate. NT ledger accounts PB account Date Details $ Date Details $ NT is concerned at the increase in irrecoverable debts during the second year of business. To reduce irrecoverable debts, he is planning to introduce one of the two following options. Option 1: To charge interest on all debts not paid within his standard terms of payment of 25 days. Option 2: To stop supplies to all customers who do not pay within his standard terms of payment of 25 days. Advise NT on which option he should introduce. Justify your answer.
7707_w22_qp_23
THEORY
2022
Paper 2, Variant 3
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Questions Discovered
34