Reference no: EM132961898

Question - The Trendy-Ones Enterprise informs you that the accounts receivable balance carried forward from 31 December 2013 was $19,800 (GST inclusive).

The business uses the Direct Write-off method for recording bad debts. On 21 January 2012, it was finally decided to write off $2,700 in account receivable balances as bad, as they were more than 2 years overdue.

Required -

(i) Show the General Journal entry to record the accounts written off.

(ii) Discuss what is conceptually wrong with the Direct Write-off approach in accounting for bad debts which is being used by the Trendy-Ones Enterprise.

(iii) Mann, the business' accountant, advises the business to use the Provision method in accounting for bad debts. The following information was made available by the accountant:

(a) If the business decided to use the % of net credit sales method, the accountant evaluated that 2% should be used. The business had a net credit sales total of $32,400 (GST exclusive) for the year 2013.

(b) If the business decided to use the ageing accounts receivable method, the accountant evaluated that 3% of the accounts receivable balance had to be estimated as doubtful debts. The accounts receivable balance at 31 December 2013 was $20,700 (GST inclusive).

(iv) Eggleton, the manager of the firm, is not sure why there are two methods and how this information should be represented in the financial statements.

(a) Explain to Eggleton why the accountant has provided two alternative provision methods.

(b) Prepare the extracts of the income statement and balance sheet and show how the doubtful debts estimated from both methods will be represented in these financial statements.