Chapter 7: Reporting and Analysing Cash and Receivables - Past Paper PDF

Okay, here's the converted markdown format: ## E7.6 Petty Cash Fund Journal Entries During October, Hair Styles Pty Ltd has the following transactions in establishing a petty cash fund: * **Oct. 1**: A petty cash fund is established with a cheque for $130 issued to the petty cash custodian. * *...

Okay, here's the converted markdown format: ## E7.6 Petty Cash Fund Journal Entries During October, Hair Styles Pty Ltd has the following transactions in establishing a petty cash fund: * **Oct. 1**: A petty cash fund is established with a cheque for $130 issued to the petty cash custodian. * **Oct. 31**: * Currency (notes): $7.80 * Coins: $0.50 * Expenditure receipts (vouchers): * Office Supplies: $36.50 * Telephone and Internet: $21.30 * Postage: $53.70 * Freight-out: $8.80 A cheque was written to reimburse the fund and increase the fund to $260. ### Required Journalise the entries in October that pertain to the petty cash fund. ## E7.7 Accounts Receivable Analysis and Bad Debt Estimation Marc Pty Ltd has accounts receivable of $92500 at 31 March 2016. An analysis of the accounts shows these amounts: **Balance, 31 March** | Month of Sale | 2016 | 2015 | | :------------------- | :--------- | :--------- | | March | $65 000 | $75 000 | | February | $12 600 | $8 000 | | December and January | $8 500 | $2 400 | | November and October | $6 400 | $1 100 | | **Total** | **$92 500** | **$86 500** | Credit terms are 2/7, n/30. At 31 March 2016 there is a $1600 credit balance in Allowance for Doubtful Debts before adjustment. The entity uses the ageing of accounts receivable basis for estimating uncollectable accounts. Marc Pty Ltd'estimates of bad debts are as follows: | Age of Accounts | Estimated percentage uncollectable | | :------------------ | :---------------------------------- | | Current | 2.0% | | 1-30 days past due | 5.0% | | 31-90 days past due | 30.0% | | Over 90 days | 50.0% | ### Required (a) Determine the total estimated uncollectables. (b) Prepare the adjusting entry at 31 March 2016 to record bad debts expense. (c) Discuss the implications of the changes in the ageing schedule from 2015 to 2016. ## E7.8 GST and Bad debt expense Brian Bazaar had sold goods on credit in September 2016 for $5500 (including 10% GST) and in November 2016 became aware that the debtor M. Waters was bankrupt and the creditors were unlikely to receive any amounts due. On 28 November, the accountant for Brian Bazaar wrote the debt off against the Allowance for Bad Debts account. Brian Bazaar uses the non-cash (accruals) basis for reporting and remitting the GST obligations. ### Required (a) Prepare the journal entry to record the bad debt write-off. (b) Prepare a brief memo to the general manager explaining the effect of the bad debt write-off on the GST liabilities and the difference between reporting the GST on the cash and non-cash (accruals) basis in regards to bad debts. ## SA7.7 Calculating Bad Debt Amounts The following information relates to Eason Ltd for 2016: * `Total credit sales`: $200 000 * `Accounts receivable at 31 December 2016`: $46 000 * `Bad debts written off`: $2 900 ### Required (a) What amount of bad debts expense will Eason Ltd report if it uses the direct write-off method of accounting for bad debts? (b) Assume that Eason Ltd decides to estimate its bad debts expense based on 5% of accounts receivable. What amount of bad debts expense will the business record if it has an Allowance for Doubtful Debts credit balance of $1600 at 31 December 2015? (c) Assume the same facts as in part (b), except that there is debit balance of $1150 in Allowance for Doubtful Debts. What amount of bad debts expense will Eason Ltd record? (d) What is the weakness of the direct write-off method of reporting bad debts expense? ## SA7.8 Journal entries related to bad debts At 31 December 2016, the trial balance of Lexington Pty Ltd contained the following amounts before adjustment: |Description|Debits|Credits| |---|---|---| |Accounts Receivable|$400 000|| |Allowance for Doubtful Debts||$1 000| |Sales||$950 000| ### Required (a) Based on the information given, which method of accounting for bad debts is Lexington Pty Ltd using - the direct write-off method or the allowance method? How can you tell? (b) Prepare the adjusting entry at 31 December 2016, for bad debts expense assuming that the ageing schedule indicates that $11750 of accounts receivable will be uncollectable. (c) Repeat part (b) assuming that instead of a credit balance there is a $1000 debit balance in the Allowance for Doubtful Debts. (d) During the next month, January 2017, a $5000 account receivable is written off as uncollectable. Prepare the journal entry to record the write-off. (e) Repeat part (d) assuming that Lexington uses the direct write-off method instead of the allowance method in accounting for uncollectable accounts receivable. (f) What type of account is the Allowance for Doubtful Debts? How does it affect how accounts receivable is reported on the statement of financial position at the end of the accounting period? ## PSA7.9 Journalise Various Receivable Transactions On 1 January 2017, Diego Ltd had: * Accounts Receivable \$146000 * Notes Receivable \$15000 * Allowance for Doubtful Debts \$13 200 The note receivable is from Annabelle Ltd. It is a 4-month, 12% note dated 31 December 2016. Diego Ltd prepares financial statements annually. During the year the following selected transactions occurred: * **Jan. 5:** Sold $16000 of merchandise to George Pty Ltd, terms n/15. * **Jan. 20:** Accepted George Pty Ltd's $16000, 3-month, 9% note for balance due. * **Feb. 18:** Sold $8000 of merchandise to Swaim Ltd and accepted Swaim's $8000, 6-month, 10% note for the amount due. * **Apr. 20:** Collected George Pty Ltd note in full. * **Apr. 30:** Received payment in full from Annabelle Ltd on the amount due. * **May 25:** Accepted Avery Ltd $6000, 3-month, 8% note in settlement of a past-due balance on account. * **Aug. 18:** Received payment in full from Swaim Ltd on note due. * **Aug. 25:** The Avery Ltd note was dishonoured. Avery Ltd is not bankrupt and ## Analyzing Receivables ### PSA7.10 Presented below is basic financial information from recent annual reports of Qantas and Air New Zealand: | Item | Qantas (A\$ million) | Air New Zealand (NZ\$ million) | | :------------------------------------------- | :------------------- | :----------------------------- | | Sales (assume all sales were credit sales) | \$13772 | \$4046 | | Allowance for doubtful debts, start of year | 27 | 2 | | Allowance for doubtful debts, end of year | 6 | 3 | | Accounts receivable balance (gross), start of year | 1054 | 274 | | Accounts receivable balance (gross), end of year | 1088 | 322 | #### Required (a) Calculate the receivables turnover and average collection period for both entities. Comment on the difference in their collection experiences. (b) Calculate the ratio of allowance for doubtful debts to gross accounts receivable (credit risk ratio) for each entity for the start of the year and at the end of the year. Comment on any apparent differences in their credit-granting practices. ## PROBLEM SET B ### PSB7.1 Samantha Perry is considering investing in a bakery that her friend, Caylie Lewis, owns. Following are selected items from financial records of the bakery. * Credit card sales: \$46 000 * Accounts payable: \$14 400 * Food supplies: \$18 500 * Outstanding bank loan: \$15 000 * Rent payable: \$4 800 * Accounts receivable: \$7 200 * Operating expenses paid: \$22 000 * GST receivable: \$2 900 * Cash at bank: \$9 200 * Loan payment: \$4 000 * Cash sales: \$22 500 * Payment to suppliers: \$18 000 #### Required (a) Calculate (i) cash inflows, (ii) cash outflows, (iii) assets and (iv) liabilities for Caylie's bakery business. (b) Based on requirement (a), what can Samantha infer in relation to investing in Caylie's bakery? (c) What other business information should Samantha seek to make the decision of whether to invest in Caylie's business? ### PSB7.2 Rabbit Ears Pet Food Ltd recently changed its system of internal control over cash disbursements. The system includes the following features. Instead of being unnumbered and manually prepared, all cheques must now be prenumbered. Before a cheque can be issued, each invoice must have the approval of Cindy Morris, the purchasing manager, and Ray Mills, the receiving department supervisor. Cheques must be signed by either Frank Malone, the accountant, or Mary Arno, the assistant accountant. Before signing a cheque, the signer is expected to compare the amounts of the cheque with the amounts on the invoice. After signing a cheque, the signer stamps the invoice 'paid' and inserts within the stamp, the date, cheque number and amount of the cheque. The 'paid' invoice is then sent to the accounting department for recording. Blank cheques are stored in a safe in the accountant's office. The combination to the safe is known by only the accountant and assistant accountant. Each month the bank statement is reconciled with the bank balance per books by the assistant managing director. #### Required Identify the internal control principles and their application to cash disbursements of Rabbit Ears Pet Food Ltd. ## PSB7.6 Accounts receivable ageing schedule for Cain Ltd. Following is an accounts receivable ageing schedule for Cain Ltd. |Customer|Total|Not yet due|1-30|31-60|61-90|Over 90| |---|---|---|---|---|---|---| |Aber|$20 000||$9000|$11 000||| |Bohr|$30 000|$30 000||||| |Case|$50 000|$15 000|$5000|||$30 000| |Datz|$38 000||||||$38 000| |Major Ltd|$120 000|$92 000|$15 000|$13 000||| |**Total**|$258 000|$137 000|$29 000|$24 000|$30 000|$38 000| |Estimated percentage uncollectable|3%|6%|12%|24%|50%| |Total estimated bad debts|$34930|$4 110|$1740|$2 880|$7 200|$19000| At 31 December 2016 the unadjusted balance in Allowance for Doubtful Debts is a credit of \$10 000. #### Required (a) Journalise and post the adjusting entry for bad debts at 31 December 2016. (b) Journalise and post to the allowance account these 2017 events and transactions. (Use running-balance format.) * 1 March, a \$600 customer balance originating in 2017 is judged uncollectable. * 1 May, a cheque for \$600 is received from the customer whose account was written off as uncollectable on 1 March. (c) Journalise the adjusting entry for bad debts at 31 December 2017, assuming that the unadjusted balance in Allowance for Doubtful Debts is a debit of \$1100 and the ageing schedule of accounts receivable indicates that total estimated bad debts will be \$29 100. ### PSB7.7 The following information relates to Benson Ltd for 2016. * Total credit sales: \$250 000 * Accounts receivable at 31 December 2016: \$57 500 * Bad debts written off: \$3625 #### Required (a) What amount of bad debts expense will Benson Ltd report if it uses the direct write-off method of accounting for bad debts? (b) Assume that Benson Ltd decides to estimate its bad debts expense based on 5% of accounts receivable. What amount of bad debts expense will the business record if it has an Allowance for Doubtful Debts credit balance of \$2000 at 31 December 2015? (c) Assume the same facts as in part (b), except that there is a debit balance of $1 438 in Allowance for Doubtful Debts. What amount of bad debts expense will Benson Ltd record? (d) What is the weakness of the direct write-off method of reporting bad debts expense? ## PSB7.8 At 30 June 2016, the trial balance of Shine Ltd |Description|Debits|Credits| |---|---|---| |Accounts Receivable|\$350 000|| |Allowance for Doubtful Debts||\$ 1500| |Sales||\$875 000| ### Required (a) Based on the information given which method of accounting for bad debts is Shine Ltd using - the direct write-off method or the allowance method? How can you tel (b) Prepare the adjusting entry at 30 June 2016 to record bad debt expense assuming that the ageing schedule indicates that \$16750 of accounts receivable will be uncollectable. (c) Repeat part (a) assuming that instead of a credit balance there is a \$1500 debit balance in the Allowance for Doubtful Debts. (d) During the next month, July 2016, a \$4500 account receivable is written off as uncollectable. Prepare the journal entry to record the write-off. (e) Repeat part (c) assuming that Shine Ltd uses the direct write-off method instead of the allowance method in accounting for uncollectable accounts receivable. (f) What type of account is the Allowance for Doubtful Debts? How does it affect how accounts receivable is reported on the statement of financial position at the end of the reporting period? ## PSB7.9 On 1 January 2017, Elam Ltd had Accounts Receivable \$54200 and Allowance for Doubtful Debts \$4700. During the year the selected transactions shown below occurred. * **Jan. 5:** Sold \$6000 of inventory to Brooks Pty Ltd, terms n/30. * **Feb. 2:** Accepted a \$6000, 4-month promissory note from Brooks Pty Ltd for balance due. * **Feb. 12:** Sold \$7800 of inventory to Gage Pty Ltd and accepted Gage's \$7800, 2-month note for the balance due. * **Feb. 26:** Sold \$4000 of inventory to Mathias Ltd, terms n/10. * **Apr. 12:** Collected Gage Pty Ltd note in full. * **June 2:** Collected Brooks Pty Ltd note in full. * **July 15:** Sold \$3000 of merchandise to Tritt Pty Ltd and accepted Tritt's \$3000, 3-month note for the amount due. * **Aug. 15:** Tritt Pty Ltd's note was discounted for \$2940. #### Required Journalise the transactions. ## PSR7.10 Presented below is basic financial information from recent annual reports of CSR Ltd and Coca-Cola Amatil Ltd (CCA): | Item | CSR Ltd (\$ million) | CCA Ltd (\$ million) | | :------------------------------------------- | :------------------- | :------------------- | | Sales (assume all sales were credit sales) | \$3754.9 | \$4546.8 | | Allowance for doubtful debts, start of year | 9.0 | 7.8 | | Allowance for doubtful debts, end of year | 7.5 | 9.0 | | Accounts receivable balance (gross), start of year | 562.1 | 671.0 | | Accounts receivable balance (gross), end of year | 491.9 | 777.6 | #### Required (a) Calculate the receivables turnover and average collection period for both entities. Comment on the difference in their collection experiences. (b) Calculate the ratio of allowance for doubtful debts to gross accounts receivable (credit risk ratio) for each entity for the start of the year and at the end of the year. Comment on any apparent differences in their credit-granting practices.