Reference no: EM131792092

Question - Rita is very happy with the work you have done in tidying up her inventory recording and valuation systems and is quite confident that her reports will now give her more useful information and provide her with a truer picture of the position and performance of the business.

However, Rita is now concerned that some of the other areas of her business could need a review given some the problems found with the recording of inventory. Rita has explained to you that she is still a little confused about the entries required when she purchased "Little Bit of Printing". In particular Rita 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.

Rita is also concerned that her accounts receivable have become a significant proportion of her assets. Prior to acquiring "Little Bit of Printing" Rita had been owed no more than a few thousand dollars. At present her accounts receivable figure totals$27,137. Rita knows that an allowance for doubtful debts account exists but has not done anything with it since the business acquisition so it remains at 3,000 Cr.

Required - Explain to Rita why the historic cost was used to record accounts receivable when acquiring "Little Bit of Printing" and the impact the fair value had on that entry.