Require 3 only

Max has asked you to update his accounts below to show him how he should have entered - Industry data shows that 6% of credit transactions are likely to go bad. Required 3 [edita the transaction in part 2. Then show the impact on Max's general ledger and Balance Sheet if the above information was applied using: 3. a. The ageing method is applied 3. b. The net sales method is applied Required 3 a.[editi Accounts Receivable Date Details Post Ref Debit Credit Balance Allowance for Doubtful Debts Post Ref Debit Credit Date Details Balance Doubtful Debts Expense Post Ref Debit Credit Balance Date Details Balance Sheet Extract (only show accounts related to this topic) As at 30 June Prior to Write off and Adjustment After Adjustment Required 3 b.[edit] Accounts Receivable Date Details Post Ref Debit Credit Balance Allowance for Doubtful Debts Date Details Post Ref Debit Credit Balance Doubtful Debts Expense Post Ref Debit Credit Date Details Balance Balance Sheet Extract (only show accounts related to this topic) As at 30 June Prior to Write off and Adjustment Required 2 [edit] Explain to Max that he has misunderstood what you meant when you told him to record bad debts "when they occur" and why his entry does not fit with the allowance method of accounting for bad debts that he is currently using. (Note - In Case Study 2 you created an Allowance for Doubtful Debts account with a $800 balance, Max has not touched this account since). In your explanation point out to Max the differences between the direct write-off and allowance methods and why the allowance method is preferred. Max now feels he has a better grasp of why the allowance method he is using is a good option but is still not sure how it actually works. Max recalls something about a net sales method and ageing receivables from his studies but doesn't know how to apply them. You have been able to gather together the following information about Max Armim Torque's debtors from Max's records, The details below have already taken into account the write off in Part 2 AGE OF ACCOUNTS AMOUNT UNCOLLECTABLE (incl. GST) ESTIMATE % 0 - 1 month 21,725.00 2 1 -6 months 18,928.80 11 6-12 months 9,880.20 46 over 12 months 1.980.00 92 52.514.00 You have also been able to ascertain that Max's revenues for the past year consist of - Credit Sales and Installations $68,700 - Cash Sales and Installations $48,200 - Sales Returns $ 7,200 (returns are only available on credit sales) 3 Design Layout References Mailings Review Documenti Table Design Layout View ibri (Body) 12 A-A- T Vabe Xxx A. A- ABCDE ABCD Normal bt ha Heading A Su Require 1: Accounts receivables represent the amount due from the various customers for the supply of goods or services done by the supplier on credit. The value of the transaction of supply recorded at the day of transaction which is termed as historical cost. Max has recorded transaction at date of sale at value of at that date. Over the period of time customers who owe max which are collectively called as accounts receivables may become unable to pay completely or partially agreed to pay or any other reasons which make accounts Receivable realization less probable then value represented at transaction date and after time period date vary. The value of accounts receivable at current date represent true value, value at current date is called fair value. The fair value of accounts receivable $52205 is less than the historical value $56419. Difference of $4214 is loss due to reduction in the value of assets, loss has to written off to the profit and loss account as per conservative principle which provide for reconciliation of losses as and when they occur. No Spacing Heading Abbcode: Heading 2 Tie Subtitle Require 2: In any business, sales are sometimes made for cash & most of the times, on account, or for credit, thereby creating accounts receivables. Some of the above credit sales turn bad, ie. The customers fail to pay the amount due. These are called bad debts. Most often, it is not certain, how much of the receivables will turn out to be actually unpaid, ie. Bad. These are called doubtful debts--- which requires recognition in financial terms. Normally, bad debts are recorded in two ways: 1. Direct-write-off, etc. Writing off as bad debts in the income statement --- when they actually occur--this will reduce the income of that year & also reduce the accounts receivable balance in the balance sheet, of the same year. 2. The other method, is the Allowance method, whereby, the balance in the allowance account(which is a contra a/c to the a/cs receivable a/c), is constantly maintained to match the accounts receivable a/c, by charging incremental bad debts expenses to the income statement, if required, or even withdrawing the excess provision, when, it is calculated to be more than that needed. The second is the most prudeat way of maintaining the receivables a/c, in that ---it is provision for some probable loss of cash, in future, which is uncertain, as yet---but going by prior experience, could be estimated ----by increasing/decreasing throttle income statement, the income is neither over nor under stated---also, one year's income statement is not unduly affected by some previous years' receivables' having become uncollectible- which, then amounts to, unfair presentation of the financial statements, of all the years involved. That way, allowance method of maintaining the bad debts provision also conforms to the accounting principles of matching the revenues with relevant expenses incurred to earn them & also caters to the principle of presenting receivables at their conservative realizable value-which will not be the case with direct-write-off method. This allowance can be created in many ways by different companies, according to the nature of their receivables, some of them are: Net sales method -- where the required balance to be maintained in the Allowance a/c is decided as a fixed % age on net sales done during the year. OR depending on the age of the uncollected &pending receivables, estimates are made on the probability of them to turn bad, & they are added up (As shown in Table ) --which is the reqd. balance, in the allowance a/c. Additional amounts are charged pass through income statement, to restore that balance. + Both methods are illustrated as follows: Age of A/cs Amount Uncollectible Amt*% receivable in Estimate% estimated months.) 2179 Net sales method -- where the required balance to be maintained in the Allowance a/c is decided as a fixed % age on net sales done during the year. OR depending on the age of the uncollected &pending receivables, estimates are made on the probability of them to turn bad, & they are added up (As shown in Table )--which is the reqd. balance, in the allowance a/c. Additional amounts are charged pass through income statement, to restore that balance. +Both methods are illustrated as follows: Age of A/cs Amount Uncollectible Amt*% receivable in Estimate% estimated months.) 0-1 1-6 6-12 Over 12 months Total 21725 18928.8 9880.2 1980 52514 2 11 36 51 100 434.5 2082.17 3556.87 1009.80 7083.34 800 Total allowance require Existing balance in the account So additional provision require 6283.34 so, the journal entry to be passed in the books will be Bad debt account 6283.34 Income 800 6283.34 Existing balance in the account So additional provision require so, the journal entry to be passed in the books will be Bad debt account 6283.34 6283.34 Allowance for doubtful debts account Income statement account Balance sheet account - contra to account receivable Suppose, the company decided to maintain 10% of net sales in the Allowance a/c, then Die Design Layout 2 A- A+ AS- AaBbCcDdEe X x = AaBbCcDdEe Normal AaBbCcDc AalbCcDdEt AaBb AalbCode Heading 1 Heading 2 No Spacing Title Subtitle Credit sales 68700 Less: Returns 7200 Net credit sales 61500 Allowance regd.(61500*10%) 6150 Existing balance in the a/c 800 so, additional provision regd. 5350 so, the journal entry to be passed in the books, under this method, will be Bad debts a/c 5350 (Income statement a/c) Allowance for Doubtful Debts a/c 5350 (Balance sheet a/c-contra to A/cs. Receivable a/c) Thus, the amounts that will be claimed as expenses, in the Income Statement may differ under both the methods. But the concept is the same Max is very happy with the work you have done in tidying up his inventory recording and valuation systems and is quite confident that his reports will now give him more useful information and provide him with a truer picture of the position and performance of the business. However, Max is now concerned that some of the other areas of his business could need a review given some the problems found with the recording of inventory. Max has explained to you that he is still a little confused about the entries required when he was considering purchasing "Ray's Motors". In particular Max is still unsure about the discrepancy between the fair value of accounts receivable and their historic cost and why the fair value was not recorded in a similar way to the other assets. Max is also concerned that his accounts receivable have become a significant proportion of his assets. Prior to expanding his business operations Max had been owed no more than a few hundred dollars. At present his accounts receivable figure totals $26,500 and this increased to $56,419 once Max purchased the group of assets and started producing his DIY Clean Air Turbo Systems. Max has been able to ascertain that at the beginning of the financial year the fair value of his accounts receivable was $52,205. Max has asked you to update his accounts below to show him how he should have entered - Industry data shows that 6% of credit transactions are likely to go bad. Required 3 [edita the transaction in part 2. Then show the impact on Max's general ledger and Balance Sheet if the above information was applied using: 3. a. The ageing method is applied 3. b. The net sales method is applied Required 3 a.[editi Accounts Receivable Date Details Post Ref Debit Credit Balance Allowance for Doubtful Debts Post Ref Debit Credit Date Details Balance Doubtful Debts Expense Post Ref Debit Credit Balance Date Details Balance Sheet Extract (only show accounts related to this topic) As at 30 June Prior to Write off and Adjustment After Adjustment Required 3 b.[edit] Accounts Receivable Date Details Post Ref Debit Credit Balance Allowance for Doubtful Debts Date Details Post Ref Debit Credit Balance Doubtful Debts Expense Post Ref Debit Credit Date Details Balance Balance Sheet Extract (only show accounts related to this topic) As at 30 June Prior to Write off and Adjustment Required 2 [edit] Explain to Max that he has misunderstood what you meant when you told him to record bad debts "when they occur" and why his entry does not fit with the allowance method of accounting for bad debts that he is currently using. (Note - In Case Study 2 you created an Allowance for Doubtful Debts account with a $800 balance, Max has not touched this account since). In your explanation point out to Max the differences between the direct write-off and allowance methods and why the allowance method is preferred. Max now feels he has a better grasp of why the allowance method he is using is a good option but is still not sure how it actually works. Max recalls something about a net sales method and ageing receivables from his studies but doesn't know how to apply them. You have been able to gather together the following information about Max Armim Torque's debtors from Max's records, The details below have already taken into account the write off in Part 2 AGE OF ACCOUNTS AMOUNT UNCOLLECTABLE (incl. GST) ESTIMATE % 0 - 1 month 21,725.00 2 1 -6 months 18,928.80 11 6-12 months 9,880.20 46 over 12 months 1.980.00 92 52.514.00 You have also been able to ascertain that Max's revenues for the past year consist of - Credit Sales and Installations $68,700 - Cash Sales and Installations $48,200 - Sales Returns $ 7,200 (returns are only available on credit sales) 3 Design Layout References Mailings Review Documenti Table Design Layout View ibri (Body) 12 A-A- T Vabe Xxx A. A- ABCDE ABCD Normal bt ha Heading A Su Require 1: Accounts receivables represent the amount due from the various customers for the supply of goods or services done by the supplier on credit. The value of the transaction of supply recorded at the day of transaction which is termed as historical cost. Max has recorded transaction at date of sale at value of at that date. Over the period of time customers who owe max which are collectively called as accounts receivables may become unable to pay completely or partially agreed to pay or any other reasons which make accounts Receivable realization less probable then value represented at transaction date and after time period date vary. The value of accounts receivable at current date represent true value, value at current date is called fair value. The fair value of accounts receivable $52205 is less than the historical value $56419. Difference of $4214 is loss due to reduction in the value of assets, loss has to written off to the profit and loss account as per conservative principle which provide for reconciliation of losses as and when they occur. No Spacing Heading Abbcode: Heading 2 Tie Subtitle Require 2: In any business, sales are sometimes made for cash & most of the times, on account, or for credit, thereby creating accounts receivables. Some of the above credit sales turn bad, ie. The customers fail to pay the amount due. These are called bad debts. Most often, it is not certain, how much of the receivables will turn out to be actually unpaid, ie. Bad. These are called doubtful debts--- which requires recognition in financial terms. Normally, bad debts are recorded in two ways: 1. Direct-write-off, etc. Writing off as bad debts in the income statement --- when they actually occur--this will reduce the income of that year & also reduce the accounts receivable balance in the balance sheet, of the same year. 2. The other method, is the Allowance method, whereby, the balance in the allowance account(which is a contra a/c to the a/cs receivable a/c), is constantly maintained to match the accounts receivable a/c, by charging incremental bad debts expenses to the income statement, if required, or even withdrawing the excess provision, when, it is calculated to be more than that needed. The second is the most prudeat way of maintaining the receivables a/c, in that ---it is provision for some probable loss of cash, in future, which is uncertain, as yet---but going by prior experience, could be estimated ----by increasing/decreasing throttle income statement, the income is neither over nor under stated---also, one year's income statement is not unduly affected by some previous years' receivables' having become uncollectible- which, then amounts to, unfair presentation of the financial statements, of all the years involved. That way, allowance method of maintaining the bad debts provision also conforms to the accounting principles of matching the revenues with relevant expenses incurred to earn them & also caters to the principle of presenting receivables at their conservative realizable value-which will not be the case with direct-write-off method. This allowance can be created in many ways by different companies, according to the nature of their receivables, some of them are: Net sales method -- where the required balance to be maintained in the Allowance a/c is decided as a fixed % age on net sales done during the year. OR depending on the age of the uncollected &pending receivables, estimates are made on the probability of them to turn bad, & they are added up (As shown in Table ) --which is the reqd. balance, in the allowance a/c. Additional amounts are charged pass through income statement, to restore that balance. + Both methods are illustrated as follows: Age of A/cs Amount Uncollectible Amt*% receivable in Estimate% estimated months.) 2179 Net sales method -- where the required balance to be maintained in the Allowance a/c is decided as a fixed % age on net sales done during the year. OR depending on the age of the uncollected &pending receivables, estimates are made on the probability of them to turn bad, & they are added up (As shown in Table )--which is the reqd. balance, in the allowance a/c. Additional amounts are charged pass through income statement, to restore that balance. +Both methods are illustrated as follows: Age of A/cs Amount Uncollectible Amt*% receivable in Estimate% estimated months.) 0-1 1-6 6-12 Over 12 months Total 21725 18928.8 9880.2 1980 52514 2 11 36 51 100 434.5 2082.17 3556.87 1009.80 7083.34 800 Total allowance require Existing balance in the account So additional provision require 6283.34 so, the journal entry to be passed in the books will be Bad debt account 6283.34 Income 800 6283.34 Existing balance in the account So additional provision require so, the journal entry to be passed in the books will be Bad debt account 6283.34 6283.34 Allowance for doubtful debts account Income statement account Balance sheet account - contra to account receivable Suppose, the company decided to maintain 10% of net sales in the Allowance a/c, then Die Design Layout 2 A- A+ AS- AaBbCcDdEe X x = AaBbCcDdEe Normal AaBbCcDc AalbCcDdEt AaBb AalbCode Heading 1 Heading 2 No Spacing Title Subtitle Credit sales 68700 Less: Returns 7200 Net credit sales 61500 Allowance regd.(61500*10%) 6150 Existing balance in the a/c 800 so, additional provision regd. 5350 so, the journal entry to be passed in the books, under this method, will be Bad debts a/c 5350 (Income statement a/c) Allowance for Doubtful Debts a/c 5350 (Balance sheet a/c-contra to A/cs. Receivable a/c) Thus, the amounts that will be claimed as expenses, in the Income Statement may differ under both the methods. But the concept is the same Max is very happy with the work you have done in tidying up his inventory recording and valuation systems and is quite confident that his reports will now give him more useful information and provide him with a truer picture of the position and performance of the business. However, Max is now concerned that some of the other areas of his business could need a review given some the problems found with the recording of inventory. Max has explained to you that he is still a little confused about the entries required when he was considering purchasing "Ray's Motors". In particular Max is still unsure about the discrepancy between the fair value of accounts receivable and their historic cost and why the fair value was not recorded in a similar way to the other assets. Max is also concerned that his accounts receivable have become a significant proportion of his assets. Prior to expanding his business operations Max had been owed no more than a few hundred dollars. At present his accounts receivable figure totals $26,500 and this increased to $56,419 once Max purchased the group of assets and started producing his DIY Clean Air Turbo Systems. Max has been able to ascertain that at the beginning of the financial year the fair value of his accounts receivable was $52,205