Chapter 10
Bad & doubtful debts
Slide 2 notes reference - page 107
Bad Debts
If a debt is definitely irrecoverable, it should be written off to the I/S a/c as a bad debt
Dr Bad debt expense (I/S) Cr Receivables (B/S)
Slide 3 notes reference - page 107
Lecture example 1
The bal c/d on the trade rec a/c is $50,000
The bad debt expense shown in the I/S is $15,000
Bad debt expenseTrade Receivables
15,000
bal b/d 65,000 Bad debt expense 15,000(Ali 7,000 + Tyson 8,000)
50,000bal c/d
Trade Receivables
65,00065,000
I/S 15,000
Slide 4 notes reference - page 108
Doubtful Debts
If a debt is possibly irrecoverable, an allowance should be set up
Dr Doubtful Debt expense (I/S)Cr Allowance for Doubtful Debts (B/S)
Slide 5 notes reference - page 108
Lecture example 2
The allowance for doubtful debts shown on the B/S is $3,500
The doubtful debt expense shown in the I/S is $3,500
Doubtful debt expense
Allow for doubtful debts 3,500
Doubtful debt expense 3,500bal c/d 3,500
3,500bal b/d
Allowance for doubtful debts
3,5003,500
I/S 3,500
Slide 6 notes reference - page 109
Types of allowance
Specific: an individual doubtful debt
General: after taking into account….
Bad debts and
Specific doubtful debts
Slide 7 notes reference - page 110
Lecture example 3
Allowance for doubtful debts
Bad & D. Debt exp (specific) 400
Trade Receivablesbal b/d 47,440 Bad Debt expense 340
Bad & doubtful debt expense
Allow for D. Debts (specific)
400
bal c/d 47,100
Trade Rec 340
47,44047,440
Slide 8 notes reference - page 110
Lecture example 3
47,100
(400)
46,700
Working: General allowance
Trade Rec (net of bad debts)
Less: specific allowance
X 2% = 934
Slide 9 notes reference - page 110
Lecture example 3
Allowance for doubtful debts
Bad & D. Debt exp (specific allow) 400bal c/d 1334
Trade Rec
bal b/d 47,440 Bad Debt expense 340
Bad & doubtful debt expense
I/S 1,674Allow for D. Debts (specific) 400
bal c/d 47,100
1,6741,674
Trade Rec 340
Allow for D. Debts (general) 934
Bad & D. Debt exp (gen allow) 934
1,3341,334
47,44047,440
Slide 10 notes reference - page 110
Lecture example 3 (cont’d)
The allowance for doubtful debts is: $1,334$1,334
Bad and doubtful debt expense is: $1,674$1,674
Slide 11 notes reference - page 111
Lecture example 4
A specific provision was made against Bugner’sdebt in Lecture example 2
Suppose that in the next accounting period,the debt is considered to have gone bad.
The double entry would be:
Dr Allowance for doubtful debts
Cr Receivables
Remove allowance
Remove debtor from B/S
Slide 12 notes reference - page 112
Lecture example 5
Allowance at 31.3.X0 = $20,000 x 5% = $1,000
Allowance at 31.3.X1 = $30,000 x 5% = $1,500
Increase in allowance = $500
Slide 13 notes reference - page 112
Bad debt recovered
Dr CashCr Trade receivables
Dr CashCr Trade receivables
as normal
Dr Trade receivablesCr Income statement
Dr Trade receivablesCr Income statement
to reverse the original bad debt
Slide 14 notes reference - page 113
I/S 7,0007,000
7,000
Lecture example 6
B/d 50,000Trade receivables Bad debt expense
Cash 7,000
50,000 50,000
Tr rec 7,000c/d 50,000BDE 7,000
Cash
Tr rec 7,000
Slide 15 notes reference - page 113
Debt specifically allowed for pays
Dr CashCr Trade receivables
Dr CashCr Trade receivables
as normal
Dr Allowance for doubtful debtsCr Doubtful debts
Dr Allowance for doubtful debtsCr Doubtful debts
to correct the original allowance
Slide 16 notes reference - page 114
I/S 3,500 3,500 3,500
b/d 3,500BDDE 3,500
Lecture example 7
B/d 50,000Trade receivables Allowance for doubtful debts
Cash 3,500
46,500 46,500c/d 46,500
Bad and doubtful debt expense
Cash 3,500
Cash
ADD 3,500
Chapter 11
Inventory Adjustments
Slide 18 notes reference - page 119
Closing stock adjustment
Inventory held at the B/S date is determined by aphysical stock count
Inventory (B/S)
Inventory (IS)
Debit Credit
1,400
1,400
Being inventory held as at 31 December 20X1
Slide 19 notes reference - page 119
Opening inventory
In the nominal ledger, at the start of 20X2, the
$1,400 inventory total appears as opening inventory
Inventory
1,400bal b/d1.1.X2
Slide 20 notes reference - page 119
Opening inventory and the trial balance
Debit Credit
InventoryReceivablesCashSalesPurchases
1,4009,2006,400
102,00072,000
Trial balance as at 31 December 20X2
Preliminary trial balance includes opening inventory
Slide 21 notes reference - page 120
Effect of ignoring inventory
Trading account for the year ended 31 December 20X2
Sales
Purchases
Gross Profit
$
102,000
(72,000)
30,000
Does not make sense!
Frank has sold 340 ovens at a profit of £100 each
Gross profit should be £34,000
340 units
360 unitsnotmatched
Slide 22 notes reference - page 120
Cost of sales
Trading a/c should show COS instead of purchases:
Opening inventory
Purchases
Less: closing inventory
$
X
X
(X)
X
XCost of sales =
Slide 23 notes reference - page 121
Lecture example 1
IS Opening inventory 1,400IS Closing inventory 5,400 5,400bal c/d
bal b/d 5,400
1,400
(5,400)(68,000)
34,000
Inventory (asset)
1.1.X2 1,400bal b/d
6,8006,800
Trading a/c for the year ended 31 December 20X2
SalesCost of salesOpening inventoryPurchasesLess: closing inventory
$ $
102,000
72,000
Gross profit
Chapter 12
Inventory valuation
Slide 25 notes reference - page 129
Inventory valuation
Governed by IAS 2
Significant figure on balance sheet (Current assets)
Direct effect on cost of sales and therefore on profit
Slide 26 notes reference - page 129
Inventories figure
How much ? - Quantity
Normally ascertained by inventory count at end of accounting period
Value ?
Guidance is provided in IAS 2
Slide 27 notes reference - page 129
Valuation
Basic rule:
“the lower of cost and net realisable value”“the lower of cost and net realisable value”
What is Cost?
…costs incurred in bringing the inventories to their present location and condition
Includes: (i) Costs of purchase(ii) Costs of conversion(iii) Other costs
Slide 28 notes reference - page 130
Net realisable value (NRV)
Selling Price 1,000
Less: Costs to completion (200)
Less: Selling costs (100)
Net realisable value 700
Slide 29 notes reference - page 130
No offset
Example:
Inventory item Cost$
NRV$
Lower$
1 27 32 27
2 14 8 8
3 43 55 43
4 29 40 29
113 135 107
The inventories figure is $107 not $113
Slide 30 notes reference - page 131
Lecture example 1The value of inventory held is $4,000
Cost
ItemA B C
10 12 6
Selling price 15 16 11
Modification costs - (3) (4)
Marketing costs (3.50) (2.50) (1)
11.50 10.50 6
Value at: Cost10
NRV10.50
Either6
No. of units held: 100 200 150
Value: $1,000 $2,100 $900+ + = $4,000
NRV
Slide 31 notes reference - page 131
Lecture example 2
Vino Ltd will show a closing inventory figure of $20,300in the accounts for 20X6.
Working
Goods sold on sale or return (50 x $6)
Closing inventory value
300
20,300
Closing inventory per question 20,000
$
Slide 32 notes reference - page 132
Methods of estimating cost
FIFO First goods purchased are first to be soldRemaining inventory is latest purchases
LIFO Last goods purchased are first to be soldRemaining inventory is earlier purchases
Average Aim to produce a reasonableapproximation to actual costcost
Slide 33 notes reference - page 133
14.11.X2 500 units21.11.X2 500 units28.11.X2 100 units
300 400 400 400
(300) (200)(200) (300)
(100)
nilnilnil 400
Closing inventory = 400 x $15 = $6,000
$12 $12.50 $14 $151.11.X2 10.11.X2 20.11.X2 25.11.X2
Open inventory/ purchases
Sales
Lecture example 3 - FIFO
Slide 34 notes reference - page 133
Lecture example 3 - FIFO
Applying the FIFO technique of inventory valuation, the closing
inventory value is and the cost of sales is$6,000 $14,200.
Cost of sales
Open inventory
Purchases
Less: closing inventory
(300 x $12)
(400 x $12.50)+(400 x $14)+(400 x $15) 16,600
3,600
(6,000)
20,200
14,200
$
Slide 35 notes reference - page 133
14.11.X2 500 units21.11.X2 500 units28.11.X2 100 units
300 400 400 400
(100) (400)(400)
(100)
nilnil100 300
$12 $12.50 $14 $151.11.X2 10.11.X2 20.11.X2 25.11.X2
Opening inventory/ purchases
Sales
Lecture example 3 - LIFO
(100)
Closing stock = (100 x $12) + (300 x $15) = $5,700
Slide 36 notes reference - page 133
Lecture example 3 - LIFO
and the cost of sales is
Applying the LIFO technique of inventory valuation, the closing
Inv. value is $5,700
$14,500.
Cost of sales
Opening inventory
Purchases
Less: closing inventory
(300 x $12)
(400 x $12.50)+(400 x $14)+(400 x $15) 16,600
3,600
(5,700)
20,200
14,500
$
Slide 37 notes reference - page 134
Lecture example 3 – simple average
Total cost
No. of units=
$20,200
1,500= $13.47 each
Simple average cost per unit:
Closing inventory = 400 x $13.47 = $5,388
Slide 38 notes reference - page 134
Lecture example 3 – simple average
Cost of sales
Open inventory
Purchases
Less: closing inventory
(300 x $12)
(400 x $12.50)+(400 x $14)+(400 x $15) 16,600
3,600
(5,388)
20,200
14,812
$
Using a simple average, the inventory value would be
and the cost of sales would be$5,388 $14,812.
Slide 39 notes reference - page 134
Lecture example 3 – weighted average
5,60014400Purchases20/11
2,457200
6,143(6,143)12.29(500)Sales14/11
8,60012.29 (W1)700
5,00012.50400Purchases10/11
3,60012300Opening inventory1/11
COSTotal
cost
Av cost
Per unit
CostUnits
(W1) $8,600 / 700 = $12.29 per unit
Slide 40 notes reference - page 134
Lecture example 3 – weighted average (cont)
1,469(1,469)14.69(100)Sales28/11
7,34314.69 (W3)500
6,00015400Purchases25/11
1,343100
6714(6,714)13.43(500)Sales21/11
8,05713.43 (W2)600
COSTotal
cost
Av cost
Per unit
CostUnits
(W2) $8,057 / 600 = $13.43 per unit
14,3265,874400
(W3) $7,343 / 500 = $14.69 per unit
O. Inv1/11
Slide 41 notes reference - page 134
Lecture example 3 – weighted average (cont)
Using a weighted average, the closing inventory value would be
and the cost of sales would be$5,874 $14,326
Slide 42 notes reference - page 135
Advantages and disadvantages
FIFO More realistic
LIFO Not permitted under IAS 2 (revised 2003)
AVCO Compromise. Can be complex – weighted average required by IAS 2
Slide 43 notes reference - page 135
In times of rising prices
FIFO Higher inventory value
Higher profits
Slide 44
End of day 3 - what to do now…
1.Course notes review
Course CompanionCourse Companion
2. Question practice
3. Study text review
• Reinforce today’s learning • Develop question skills