QUESTION 4 (30 marks) Doors and Floors Ltd is a retailer of furniture and fittings who allows customers to buy on credit. The following information pertains to Doors and Floors for the year ended 31 March 2021: Extract from the pre-adjusted trial balance of Doors and Floors as at 31 March 2021 Trade receivables 1 560 000 Allowance for doubtful debts 156 000 The following are policies of Doors and Floors Ltd: Doors and Floors Ltd has a policy to provide an allowance for bad debts of 10% of their trade receivable balance. . It is Doors and Floors Ltd's policy to reinstate debtors who were previously written off if they repay their debts thereafter. The following additional information relates to the trade receivable cycle that were not taken into account in the accounting records for the 2021 financial year. 1. A debtor, Mr X. Huang who had debt of R6 700 was untraceable. It was thus decided to write off his debt as irrecoverable. 2. A credit note of R2 500 for goods returned had been incorrectly entered in the records on 15 March 2021 as if it were an invoice. 3. A credit sale to debtor, Mr D. Barry amounting to R750 was recorded incorrectly to debtor, Mr P. Barnard in the Debtors' Ledger on 18 March 2021. 4. The March 2021 bank statement reflected a dishonoured (R/D) cheque for an amount of R35 400. This cheque had been received on 3 March 2021 from debtor Mrs L. Singh and had been deposited in the bank account on the same day and correctly recorded in the cash receipts journal on that day. 5. A settlement discount of R1 800 had been completely omitted from the records. 6. On 25 March 2021, an amount of R6 700 was received by Mr X. Huang. Mr X. Huang explained that he was visiting his remote hometown in China and had completely forgotten about his debt owed and remembered only once returned. 9 7. Debtor, Mrs T. Zolani was declared insolvent during 2021. The total debt owed by her on 31 March 2021 was R38 600. Mrs T. Zolani's lawyer confirmed that Doors and Floors Ltd would receive 15c for each Rand owed. On 31 March 2021, a payment was received from Mrs T. Zolani's lawyer. The remainder of Mr T. Zolani's debt was written off as irrecoverable. 8. A credit sale transaction of R43 500 and a sales return transaction of R 7 900 that occurred on the 31 March 2021 was omitted from the respective journals. REQUIRED: 4.1 Prepare the Trade Receivables account in the General Ledger. Show all workings. Ignore VAT. (27 Marks) 4.2 There are risks to investing in working capital. State what the consequences are to the risks mentioned below: 4.2.1 Where criteria for deciding whether to allow customers to purchase on credit are too strict. 4.2.2 Where levels of inventory are too high. 4.2.3 Where cash levels are too high. (3x1 = 3 Marks)
