PLEASE WAIT…
LECTURE WILL BEGIN SHORTLY
@ 10.00 AM
ACC 1701X / 1002X
Accounting for Decision Makers/ Financial Accounting
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
1
ACCOUNTING
The language of the business world
ACC 1701X / ACC1002X
Accounting for Decision Makers/ Financial Accounting
Lecturer: Dr. Hanny Kusnadi
Prior Lecture Refresher
▪ Purpose of Internal Control
▪ Internal Control
▪ Cash Receipts Over-the-Counter
▪ Cash Receipts Remotely
▪ Cash Disbursements
▪ Bank Reconciliation
Refresh your memory!
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
3
Chapter 08
Receivables, Bad Debt Expense,
and Interest Revenue
Goals for Today
Concepts
Accounting
Procedures
Financial Analysis
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
▪ Accounts Receivables (AR)
▪ Notes Receivables
▪ Direct write-off method vs Allowance
method to account for impairment of AR
▪ Assessment of impairment under
allowance method
▪ Accounts Receivables Turnover
▪ Days to Collect
5
What are Receivables?
A receivable is an amount due from another party.
Accounts Receivables (Trade Receivables)
▪ Amounts due from customers for credit sales as a result of selling goods or
providing services during the normal course of business.
▪ Fairly liquid asset – usually reported after cash and current investments on the
Statement of Financial Position (SFP)
Notes Receivables
▪ A promissory note to pay a specified amount of money, usually with interest, either
on demand or at a definite future date.
▪ Sometimes an accounts receivable can be converted to a note if a customer requests
additional time to pay a past-due accounts receivable account.
Other Receivables
▪ E.g. Interest receivables, rent receivables, receivables from employees
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
6
Accounts Receivables
Reporting Credit Sales Revenue
▪ To record credit Sales Revenue, the general journal entry which we
have learnt is:
Dr Accounts Receivable – Customer Name XXX
Cr Sales Revenue
XXX
▪ To collect on credit sales, the general journal entry which we have
learnt is:
Dr Cash
XXX
Cr Accounts Receivable – Customer Name
XXX
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
7
Accounts Receivables
Subsidiary Accounts vs. General Ledger
AR Ledger (Subsidiary Accounts):
Accounts Receivable - Co Alpha
1-Sep
500
5-Sep
200
Bal
700
Accounts Receivable - Co Beta
23-Sep
100
27-Sep
50
Bal
150
Accounts Receivable - Co Sigma
1-Sep
450
Bal
450
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
General Ledger:
Accounts Receivable
1-Sep
950
5-Sep
200
23-Sep
100
27-Sep
50
Bal @ 31 Sep
1300
• Companies maintain a separate account
for each customer and tracks the
customer’s purchases, payments and
outstanding amount still owed to the
company.
• This supplementary record is called
accounts receivables ledger
8
Pros and Cons of Extending Credit
Advantage
1. Increases the seller’s revenues.
Disadvantages
1. Increased wage costs – hire more people to check and track
customer’s credit and follow up on the accounts
2. Bad debt costs – risk that some customers may eventually not
pay their account balance
3. Delayed receipt of cash - can only collect cash on the
accounts 30-60 days later, or even longer.
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
9
Advantages of Credit Cards
▪ Companies accept credit cards (and debit cards) for several reasons:
▪ To increase sales (more payment options for customers)
▪ To avoid tremendous costs of “credit checking” customers (credit card
company does it for you)
▪ To avoid losses due to bad checks (risk of credit transferred to the
credit card company)
What do you mean
CASH only?!?!?
▪ To receive payment quicker.
▪ The company pays a fee to the credit card company for
its services.
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
What is this,
the dark ages?
10
Reporting Credit Card Sales
For example: Takashimaya Department Store’s credit card sales on Sept
1st is $10,000. The credit card company charges a 3% service fee.
▪ Journal entry if payment is received immediately by the company:
Dr
Cash
$ 9,700
Dr
Credit Card Expense
$ 300
Cr
Sales Revenue
$10,000
▪ Journal entry if payment is owed by the credit card company:
Dr
Accounts Receivable – Credit Card $ 9,700
Dr
Credit Card Expense
$ 300
Cr
Sales Revenue
$10,000
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
11
Valuing Receivables
Not all receivables are collectable!
▪ FRS 109 (IFRS 9) : Accounts receivable should be assessed for any
possibility of impairment (portion that may not be collectible
ultimately)
▪ Recall the Matching Principle:
▪ Matching of revenues & expenses in the same period.
▪ Therefore, a recording of Bad Debt Expense (for the
uncollectible amounts) in the same period that the
sales occur is required!
▪ Variation of names you will see: Bad debt expense,
Doubtful debt expense, AR impairment loss,
Uncollectible account expense.
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
If you know how to
beg, we may have a
position for you in
Accounts
Receivable.
12
Valuing Receivables
There are two methods of accounting for bad debts:
(1) Direct Write-Off Method
▪ Not accepted under IFRS/GAAP
▪ Some companies may use it, when impairment losses are insignificant
(2) Allowance Method
▪ Accepted under IFRS/GAAP
▪ (i) Individual Assessment
▪ (ii) Group (Collective) Assessment : Aging of Accounts Receivable
Important Note: This lecture will go into much more details on the Allowance
Method under IFRS 9 than your textbook. These lecture materials are examinable.
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
13
(1) Direct Write-off Method
▪ Directly write off the customer’s accounts receivable account to Bad Debt Expense
when it becomes clear that the amount is not collectible (i.e. turn bad):
Dr Bad Debt Expense
XXX
Cr Accounts Receivable – Customer Name
XXX
▪ If account becomes collectible at a future date, a reversing entry to reinstate the
accounts receivable is needed, plus a second entry to record cash received.
Dr Accounts Receivable – Customer Name
XXX
Cr Bad Debt Expense
XXX
Dr Cash
XXX
Cr Accounts Receivable – Customer Name
XXX
Not Accepted under IFRS / GAAP!
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
14
(2) Allowance Method
▪ Company
does not wait for the accounts receivable to actually turn bad
▪ At
the end of each period, company estimates total bad debts
(impairment loss) that may turn bad based on signs of impairment.
Advantages of the allowance method:
(1)
Recording bad debt expense in the same period that related sales are
recorded → Matching Principle
(2)
Accounts receivable is reported on the Statement of Financial
Position at the estimated amount of cash to be collected (i.e.
Accounts receivable balance less allowance for bad debts)
→ Gives a more realistic representation of the company’s assets
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
15
(2) Allowance Method
2 Main steps in the Allowance Method:
1) Estimate and record Bad Debt Expense at the end of the period.
▪A contra-asset account called Allowance for Doubtful Accounts
(Allowance for Bad Debts/Allowance for AR Impairment Loss) is used.
▪Usually through an AJE at the end of the period
2) Write-off specific customer’s accounts receivable once they are
determined to be uncollectible.
▪The contra-asset account Allowance for Doubtful Accounts is reduced
during write-offs
▪The customer’s specific accounts receivable is removed
▪Can be done at any time in other periods
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
16
Allowance for Doubtful Accounts
Takashimaya Example
E.g. At the end of 2019, Takashimaya estimates that 10% of its $500,000 Accounts
Receivable may be uncollectable. (10% x 500,000 = $50,000)
1) Record Bad Debt Expense:
Dec 2019
Bad Debts Expense
$50,000
Allowance for Doubtful Accounts
Stmt of Financial Position impact:
Accounts Receivable
500,000
Less Allowance for
Doubtful Accounts
(50,000)
Accounts Receivable (net) 450,000
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
Income Statement impact:
Revenues
Expenses:
Bad Debt Expense
$50,000
XXX
50,000
17
Allowance for Doubtful Accounts
Takashimaya Example
2) Write off: In February 2020, Soft Towel Store has gone bankrupt and Takashimaya
determines that Soft Towel’s accounts receivable of $2,500 will be uncollectible.
Feb 2020
Allowance for Doubtful Accounts
$2,500
Accounts Receivable – Soft Towel (A)
$2,500
▪ Note that writing off uncollectible accounts did not affect any income statement
accounts, because bad debt expense has already been taken in the period of 2019 during
the period of sale.
▪ The write-off also does not affect the realizable value of accounts receivable.
Before Write-Off
After Write-Off
Accounts Receivable
500,000
497,500
Less Allowance for Doubtful Accounts
50,000
47,500
Accounts Receivable (reported on SFP)
450,000
450,000
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
18
Recovery of Bad Debt
(Already written off receivables)
▪ Sometimes a customer may pay all or part of the amount owed on an account even
after it has been written off. If an account has been written off and later proves to be
collectible, we have to:
1) Reverse the write-off entry
2) Record the collection.
▪ Takashimaya Example: In Aug 2020, Takashimaya managed to collect part of a
receivable from Soft Towel Store which had previously been written off, in the
amount of $1,000.
1) Aug 2020
Accounts Receivable – Soft Towel
$1,000
Allowance for Doubtful Accounts
2) Aug 2020
Cash
$1,000
$1,000
Accounts Receivable – Soft Towel
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
$1,000
19
Allowance Method vs. Direct Write-off
Illustration Example
DIRECT WRITE OFF
Year 2019
Journal entry for Sales in 2019
Accounts Receivable
500
Sales Revenue
Income Statement effect:
Revenue
Bad Debt Expense
Net Income
SFP effect
Accounts Receivable
500
500
0
500(overstated)
500(overstated)
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
ALLOWANCE METHOD
Year 2019
Journal Entry for Sales in 2019
Accounts Receivable
500
Sales Revenue
500
Record Bad Debt (assume 10% uncollectible)
Bad Debt Expense
50
Allowance for Doubtful Accounts
50
Income Statement effect:
Revenue
Bad Debt Expense
Net Income
500
50
450
SFP effect
Accounts Receivable
Less Allowance for Doubtful Acct
Accounts Receivable (net)
500
50
450
20
Allowance Method vs. Direct Write-off
Example
DIRECT WRITE OFF
Year 2020
90% of sales collected, 10% uncollectible
Cash
450
Bad Debt Expense
50
Accounts Receivable
Income Statement effect:
Revenue
Bad Debt Expense
Net Income
500
ALLOWANCE METHOD
Year 2020
90% of sales collected, 10% uncollectible
Cash
450
Allowance for Doubtful Accounts
50
Accounts Receivable
Income Statement effect:
0
Revenue
50
Bad Debt Expense
-50(understated) Net Income
SFP effect
Accounts Receivable
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
0
SFP effect
Accounts Receivable
Less Allowance for Doubtful Acct
Accounts Receivable (net)
500
0
0
0
0
0
0
21
Allowance Method
Estimation ≠ Actual
▪ Allowance for Doubtful Accounts is based on an estimation.
▪ Most times, estimated uncollectible is not going to be exactly equal to the actual bad
debt to be written off
➔ (1) Over-estimation / (2) Under-estimation of Allowance for Doubtful Accounts
(1) Over-estimation of Allowance for Doubtful Accounts
ALLOWANCE METHOD
Year 2019
Journal Entry for Sales in 2019
Accounts Receivable
500
Sales Revenue
500
Record Bad Debt (assume 10% uncollectible)
Bad Debt Expense
50
Allowance for Doubtful Acct
50
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
▪ In 2020, 95% of sales collected. Only 5% is
uncollectible
Cash
475
Allowance for Doubtful Acct
25
Accounts Receivable
500
▪ Allowance for Doubtful Accounts will have a
net credit balance of $25 at the end of 2020.
22
Allowance Method
Estimation ≠ Actual
(2) Under-estimation of Allowance for Doubtful Accounts
ALLOWANCE METHOD
Year 2019
Journal Entry for Sales in 2019
Accounts Receivable
500
Sales Revenue
500
Record Bad Debt (assume 10% uncollectible)
Bad Debt Expense
50
Allowance for Doubtful Acct
50
▪ In 2020, only 80% of sales collected, 20% is
uncollectible
Cash
400
Allowance for Doubtful Acct
100
Accounts Receivable
500
▪ Allowance for Doubtful Accounts will have a
net debit balance of $50 at the end of 2020.
Allowance for Doubtful Accounts
Year 2019
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
Year 2020
100
Bal @2020
50
50
23
Allowance Method
Estimation ≠ Actual
▪ Overview of Over/ Under-estimation of Allowance for Doubtful Accounts:
Scenario
(1) Over-estimation
Effect on Allowance account
Net credit balance in the Allowance account
(2) Under-estimation
Net debit balance in the Allowance account
▪ What do we do with the net credit/debit balance in the Allowance account at
the end of the accounting period?
▪ In practice, accountants will do an overall review and adjustment to the
Allowance account only prior to external reporting, such as at year-end.
▪ The normal balance of the Allowance account is a credit balance (remember, it
is a contra-asset account to Accounts Receivable!)
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
24
Estimation of Allowance for Doubtful Accounts
With effect from 1st Jan 2018, under FRS 109 (IFRS 9):
▪ Expected Credit Loss (ECL) model is used to estimate impairment of
accounts receivable.
▪ For short-term accounts receivable, loss allowance estimate should be
equal to the lifetime expected credit losses.
▪ An entity may use a simplified “provision matrix” for calculating
expected losses as a practical expedient for receivables.
▪ Provision matrix may specify provision rates based on number of days an accounts
receivable is past due → higher rates for longer due account: AGING ANALYSIS
▪ Accounts may be grouped based on reasonable groupings such as geographical
regions, product types, customer ratings, etc…
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
25
Steps in Estimation of Allowance
▪ The general approach to estimating the allowance is:
(1) Identify specific accounts with known credit problems → Individual assessment
(2) All other accounts receivable with no known credit problems → Group assessment
using provision matrix to perform aging analysis:
Classify each receivable by how long it is past due.
Each age group is multiplied by its estimated bad debts
percentage.
Estimated bad debts for each group are totaled.
(3) Estimates from individual and group assessment ➔ total allowance required at
reporting date
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
26
Estimation of Allowance
Example: Fab Co.
▪ Fab Company is estimating its allowance for doubtful accounts (i.e.
AR impairment loss) for the year of 2020 under IFRS.
▪ Its accounts receivable balance @ 31st Dec 2020 is $600,000.
▪ Details of its accounts receivable balance is as follows:
AR Customers
Amount
Status
Customer – Cool Co.
$100,000
Objective evidence that Cool Co. is
in trouble and some amount would
be uncollectible.
All other customers
$500,000
No obvious evidence that accounts
will be uncollectible
▪ Let’s estimate the Allowance for Doubtful Accounts for Fab Co.
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
27
Estimation of Allowance Example: Fab Co.
STEP 1 – Individual Assessment
▪ Step 1: Individual assessment for specific accounts known to have credit problems.
AR Customers
Amount
Status
Customer – Cool Co.
$100,000
Objective evidence that Cool Co. is
in trouble and some amount would
be uncollectible.
All other customers
$500,000
No obvious evidence that accounts
will be uncollectible
▪ Suppose Fab Co. estimates that there is 90% chance that the entire amount owed by Cool
Co. will be uncollectible: 90% x $100,00 = $90,000
Bad Debt Expense
90,000
Allowance for Doubtful Accounts
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
90,000
28
Estimation of Allowance Example: Fab Co.
STEP 2 – Group Assessment
▪ Step 2: Group assessment for remaining accounts receivable balance
AR Customers
Amount
Status
Customer – Cool Co.
$100,000
Objective evidence that Cool Co. is
in trouble and some amount would
be uncollectible.
All other customers
$500,000
No obvious evidence that accounts
will be uncollectible
▪ Based on FRS 109 (IFRS 9), use provision matrix to collectively assess the accounts by
performing an aging analysis
▪ Categorize all accounts receivables accounts according to their age. i.e. how long they
are overdue at the reporting date (which for this example is @Dec 31, 2020).
▪ Uncollectible amounts are estimated for each age category.
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
29
Estimation of Allowance Example: Fab Co.
STEP 2 – Group Assessment (Aging Analysis)
▪ Aging Analysis for Fab Co. Accounts Receivables for group assessment:
Fab Co.
Schedule of Accounts Receivable by Age
31 December 2020
Not Yet
1-30
31-60
61-90
Due
Days
Days
Days
Customer
Over 90
Days
Total
Company A
60,000
20,000
30,000
30,000
20,000
160,000
Company B
130,000
35,000
40,000
-
-
205,000
Company C
-
-
55,000
20,000
35,000
110,000
:
Company Z
Total
Estimated %
Uncollectible
Estimated Bad Debts
:
:
:
:
:
-
-
-
-
-
25,000
25,000
190,000
55,000
125,000
50,000
80,000
500,000
1%
5%
15%
25%
50%
1,900
2,750
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
18,750
12,500
40,000
75,900
Percentage uncollectible
is estimated based on
historical loss experience
and assessment of
current economic
condition
Target balance of
the Allowance
account (i.e. the
Allowance account
is to be adjusted to
this target balance)
30
Estimation of Allowance Example: Fab Co.
STEP 2 – Group Assessment
Estimated Bad Debts
1,900
2,750
18,750
12,500
40,000
75,900
▪ Based on our aging analysis, the target balance of the Allowance account should be
$75,900.
▪ Suppose that the Allowance for Doubtful Accounts had an existing $27,000 balance
(credit balance) before any adjustment.
➔ adjustment needed: 75,900 – 27,000 = 48,900
▪ The adjusting journal entry is:
Bad Debt Expense
48,900
Allowance for Doubtful Accounts
Allowance for Doubtful Account
Beg Bal
27,000
31-Dec
48,900
End Bal
75,900
48,900
(Note: To simplify illustration, the above is for allowance under group assessment only.
Allowance made for Cool Co. under the individual assessment in Step 1 will be added
later, see Summary table in the next slide)
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
31
Estimation of Allowance Example: Fab Co.
STEP 3 – Total Allowance and Bad Debt Expense
Individual
Assessment
(Cool Co.)
Group
Assessment
(Aging of all
other
receivables)
100,000
500,000
600,000
(90,000)
(75,900)
(165,900)
10,000
424,100
434,100
90,000
48,900
138,900
Total
SFP effect
Accounts Receivable
Less Allowance for Doubtful
Accounts
Accounts Receivable (net)
To Statement
of Financial
Position
(SFP)
Income Statement effect
Bad Debt Expense
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
To Income
Statement
32
C2
Notes Receivable
A promissory note is a written promise to pay a specified amount of
money, usually with interest, either on demand or at a definite future date.
▪ Usually interest bearing
▪ Large amounts
▪ Longer credit period
▪ Can arise from:
(1) Sales : similar to AR, but for larger sales with longer credit period
(2) Extension of AR : convert AR into a note with longer credit period
(3) Lending to external party (e.g. supplier, business partner)
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
33
Recording Notes Receivable
▪ Suppose Fab Co. receive a 6-month note of $50,000 at 10% interest rate
(annual) on October 1st 2020:
▪ Journal entries for the note under different scenarios:
(1) For Sales:
Notes Receivable
50,000
Sales Revenue
(2) Conversion from AR: Notes Receivable
50,000
50,000
Accounts Receivable
(3) For Lending:
Notes Receivable
Cash
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
50,000
50,000
50,000
34
Notes Receivable
Recording Interest for Short-term Note
▪ At Dec 31st 2020, an adjusting entry is needed for Fab Co. to accrue
interest income from the note (payment has not been received from the
customer).
▪ $50,000 Note is for 6 months starting Oct 1st 2020 at 10% annual interest
rate, therefore the interest income to accrue for the period of 2020 is for 3
months only:
$50,000 x 10% x (3/12) = $1,250
▪ The adjusting entry at year end is:
Interest receivable
1,250
Interest Income
1,250
(Note: this computation is only for short-term notes. For long-term notes, we have to
take into consideration the time value of money, which will not be covered in this
module but in more advanced accounting modules)
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
35
Notes Receivable
Recording Collection of Principal + Interest
▪ On March 31st 2021, Fab Co. collects on the note (principal + interest)
▪ Fab Co. recognizes interest income for the 3 months of Jan-Mar 2021 :
$50,000 x 10% x (3/12) = $1,250
▪ The journal entry to record collection of principal and interest is:
Cash
52,500
Interest Receivable
1,250
Interest Income
1,250
Note Receivable
50,000
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
36
C3
Disposal of Receivables
Companies can convert receivables to cash
before they are due.
Selling
Receivables
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
Pledging
Receivables
37
Goals for Today
Concepts
Accounting
Procedures
Financial Analysis
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
▪ Accounts Receivables
▪ Notes Receivables
▪ Direct write-off method vs Allowance
method to account for impairment
▪ Assessment of impairment under
allowance method
▪ Accounts Receivables Turnover
▪ Days to Collect
38
Assessing Efficiency and Liquidity
Accounts Receivables Turnover
Accounts Receivables (AR) Turnover
Accounts
Receivables =
Turnover
Net Sales
Average Accounts Receivable
▪ Measures how often are receivables received and collected – how many times a
year a company converts its average accounts receivables into cash.
▪ Useful to assess how efficient management has been in granting credit to produce
revenue.
▪ Higher the ratio, the faster the collection
▪ Some users find it easier to think of the AR turnover in terms of number of days to
collect AR → Days to Collect (see next slide)
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
39
Assessing Liquidity & Efficiency
Days to Collect AR
Days to Collect
Days to
Collect
365
=
AR Turnover
▪ Measures how many days on average it takes the company to collect on its accounts
receivables and convert it to cash.
▪ Also known as “Days’ Sales Uncollected”
▪ Useful to assess how efficient a company is in collecting is receivables
▪ Shorter days is preferred: indicate faster conversion to cash
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
40
AR Turnover & Days to Collect
An example: ComfortDelGro
ComfortDelGro
2019
2018
Average Trade Receivables
297.1
263.0
3,905.7
3,805.2
13.42
14.47
27.76
25.23
Net Sales
AR Turnover (Net Sales / Avg AR)
Days to Collect (365 days / AR
Turnover)
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
41
AR Turnover & Days to Collect
ComfortDelGro vs Uber
Let’s compare ComfortDelGro with its competitor Uber:
ComfortDelGro
2019
2018
Uber
Average Trade Receivables
297.1
263.0
Net Sales
AR Turnover (Net Sales /
Avg AR)
Days to Collect (365 days /
AR Turnover)
3,905.7
3,805.2
13.42
14.47
27.76
25.23
2019
2018
Average Trade Receivables
1,066.5
919
Net Sales
AR Turnover (Net Sales /
Avg AR)
Days to Collect (365 days /
AR Turnover)
14,147
11,270
13.27
12.27
27.52
29.76
▪ Uber’s AR Turnover and Days to Collect is comparable to ComfortDelGro
▪ For 2019, both companies convert their average accounts receivable balance into
cash about 13 times during that year.
▪ On average, both collect their receivables within a month (30 days).
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
42
PollEv Quick Quiz
▪The link for the PollEv activity in
class is:
PollEv.com/bizhann
▪Or scan the QR code.
ACC 1701X/1002X (AY2021S1) LECTURE 06 POST-Slides
43
Quick Quiz Answer Explained
Question #1
Q. Credit sales are recorded by crediting an Accounts Receivable.
A. FALSE
Explanation:
Credit sales are recorded with the following entry:
Dr Accounts Receivable
Cr Sales Revenue
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Quick Quiz
Answer Solution
Q#2. The use of an allowance for bad debts requires an adjusting entry
before financial statements are prepared. TRUE
Q#3. The matching or revenue recognition principle requires that accrued
interest on outstanding notes receivable be recorded at the end of each
accounting period. TRUE
Q#4. When using the allowance method of accounting for uncollectible
accounts, the entry to write off Company Joe's uncollectible account is:
Debit Allowance for Doubtful Accounts, and Credit Accounts Receivable
– Company Joe. TRUE
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Quick Quiz
Answer Solution Question #5
Q#5. When using the allowance method of accounting for uncollectible accounts, the recovery
of a bad debt would be recorded as:
Dr Cash
Cr Bad Debts Expense.
A. FALSE
Explanation:
There are two entries involved in recoding the recovery of an account already previously
written off:
Entry #1 to reinstate the accounts receivable account:
Dr Accounts Receivable
Cr Allowance for Doubtful Accounts
Entry #2 to record collection and removal of the accounts receivable.
Dr Cash
Cr Accounts Receivable
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Quick Quiz
Answer Solution Question #6
Q#6. The interest accrued on $6,500 at 6% for 2 months is:
A: $6,500 x 0.06 x 2/12 = $65
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Quick Quiz
Answer Solution Question #7
Q#7. Chase Company concluded that a customer’s accounts receivable of
$2,000 was uncollectable this year and it should be written off. Chase
Company uses the allowance method to account for bad debt. What effect
will this write-off have on its net profit this year?
A. No effect on net profit.
Explanation:
The entry for writing off an account is:
Dr Allowance for Doubtful Accounts
Cr Accounts Receivable
Both are balance sheet accounts that will NOT affect the income statement!
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Quick Quiz
Answer Solution Question #8
Q#8. Chase Company’s unadjusted trial balance on December 31, 2020 shows the
following:
Dr
Cr
Accounts Receivable
50,000
Allowance for Doubtful Accounts
800
Assuming 5% of outstanding accounts receivable at the end of the current year will be
uncollectible, what is the amount of bad debt expense recorded this year?
Solution:
Step 1: Calculate the target balance (i.e adjusted balance) of the Allowance for Doubtful
Accounts as at Dec 31, 2020:
$50,000 x 5% = $2,500
➔ The target balance (credit balance) of the Allowance for Doubtful Account is $2,500.
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Quick Quiz
Answer Solution Question #8
Step 2: We need to bring the Allowance for Doubtful Accounts to its adjusted target
balance (of $2,500 as calculated in Step 1) with an adjustment entry.
Adjustment needed to bring current balance to desired balance:
$2,500 credit - $800 credit = $1,700 credit
Allowance for Doubtful Accounts
Unadj Bal
Adjustment
Adj Bal
800
1,700
2,500
Step 3: Record the adjusting entry for bad debt expense for the year:
Dr
Bad Debt Expense
$1,700
Allowance for Doubtful Accounts
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$1,700
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Take Away for Lecture 06
▪ Accounts Receivable
▪ How to account of Impairment of AR
▪ Direct write-off method vs Allowance method
▪ Assessment of impairment under allowance method (IFRS 9)
▪ Notes Receivable
▪ AR Turnover + Days’ Sales Uncollected
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Looking Forward…
What to expect after recess week
Recess Week Next Week :
There will be NO lectures & tutorials next week!
After Recess week, Prof. Elaine Tan will be covering:
▪ Lecture 07 : Chapter 6 - Merchandising Operations and the Multistep Income Statement
▪ Lecture 08 : Chapter 7 – Inventory and Cost of Goods Sold
▪ Lecture 09 : Chapter 9 – Long-Lived Tangible Assets
▪ Lecture 10 : Chapter 11 – Stockholders’ Equity
▪ Lecture 11 : Chapter 12 – Statement of Cash Flow
▪ Lecture 12 : Chapter 10 & 13 – Liabilities & Measuring and Evaluating Financial
Performance
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It has been a great 6 weeks with you!
Important Notes:
▪ Next week is Recess Week – NO LECTURE & TUTORIALS!
▪ After recess week, Prof. Elaine Tan will be lecturing the remaining
module (Lectures 07 – 12)
▪ I can still be reached for any questions relating to the module and
lecture materials.
▪ My email: bizhann@nus.edu.sg
See you around!
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