Question

Pretty Pet Shop had the following unadjusted account balance as at 31 December 2018. Debit Credit S. Cash Prepaid expense Inventory Investment in securities Account Receivables Patents Plant and equipment Net sales (80% on credit) Allowance for Impairment 20,000 30.000 250,000 100,000 600,000 800,000 950,000 1,400,000 (a) Identity three types of financial assets included in the above unadjusted trial balance and describe their basis for valuation in the Statement of Financial Position in columnar form as below. Type of financial asset Basis for valuation in the statement of financial position (6 marks) (b) On 31 December 2018, an aging schedule of accounts receivable was produced under the following four groupings: Days Account outstanding Amount (S) Estimated % of Uncollectible Not yet due 360,000 1% 1-30 days past due 50,000 31-90 days past due 90,000 10% >90 days past due 100,000 20% 600.000 2% Prepare the adjusting entries to record the impairment loss of receivable for the year 2018 under Statement of Financial Position Approach. (4 marks) (c) Prepare the adjusting entries to record the impairment loss of receivable for the year 2018 if it is estimated that 1% of net credit sales for the year will become uncollectible. Assume Pretty Pet Shop uses Income Statement Approach. (4 marks) (d) The company learnt that one customer with the amount owed $3,000 was bankrupt on 3 February 2019. Prepare journal entries to write off the debt. (2 mark)

Answer 1

Part (a)

1. Inventory:- Cost or Net Realizable Value, whichever is less

where,

Cost = Purchase Cost + any other costs incurred to bring inventory to its present condition

NRV = Expected selling price ‘less’ cost of disposal

2. Patents (Intangible Assets);- Acquisition/Purchase cost, and is annually tested for impairment

3. Plant and Equipments (Fixed Assets):- Recorded at cost, including any costs necessary to make the assets ready for use.

Such cost is then allocated to the income statement over the life of the asset as Depreciation.

Part B

Impairment Loss = (360000*1%) + (50000*2%) + (90000*10%) + (100000*20%) = $33600

Adjusting Entry

Allowance for Impairment A/c    Dr.    33600

   To Account Receivables                                 33600

Part C

Net credit sales = 80% of $1,400,000 = $1,120,000

Estimated Un-collectible Receivables = 1% of $1,120,000 = $11,200

Adjusting Entry

Allowance for Impairment A/c    Dr.    11200

   To Account Receivables                                 11200

Part D

3 Feb 2019

Bad Debts A/c   Dr.              3000

   To Account Receivables            3000

P&L A/c           Dr.       3000

To Bad Debts                       3000