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