Impairement of trade receivables

Question 1

Is it an asset? (3)

Answer 1

Yes, it meets the asset definition

1. Is an economic resource (a right with the potential to produce economic benefits (EB’s))
2. Controlled by the business
3. Present as a result of past events

Question 2

Should we report it on the SOFP? (3)

Answer 2

Yes if it meets the recognition criteria.

1. No existence uncertainty
2. Probability of EB flow is not low
3. Measurement uncertainty is not high

Question 3

At what amount do we report it? (3)

Answer 3

• Apply measurement principles for that asset
• Often assets are measured below the value of EB’s it is expected to produce
• But no asset can be measured above the value of the expected EB’s

Question 4

Why are trade receivables especially vulnerable to impairment?

Answer 4

because it is initially measured at the maximum expected EB’s.

Question 5

What are two kinds of reasons to impair trade receivables? (2)

Answer 5

1. When a doubtful debt is identified, i.e. business is informed that a debtor is unlikely to pay the (full) amount owed
2. At year-end, an estimate is made of the doubtful debts which have not yet been identified (i.e proportion of the amount owed which is unlikely to be calculated)

Question 6

When is a doubtful debt is identified?

Answer 6

When a journal entry (perhaps processed by bookkeeper, or perhaps an adjusting entry):
DR Bad debts expense (P/L)
CR Trade receivables (A)

Question 7

What is the amount used by ?

Answer 7

The amount that is not expected to be collected

Question 8

What is the amount that is debited to bad debts expense?

Answer 8

The remainder of what the customer cannot pay back

Question 9

What happens with doubtful debts at year-end?

Answer 9

Even though the business cannot identify whose debts are doubtful, it can predict that some of the total owed is uncollectible

Question 10

What is the adjusting journal entry for doubtful debts at year end?

Answer 10

DR Bad debts expense (P/L)

CR Allowance for doubtful debts (-A)

Question 11

What is a negative asset account?

Answer 11

In the ledger but not on the SOFP. Instead, their CR balances will be subtracted from the related asset balance when the SOFP is prepared.

Question 12

What amount is credited to the Allowance for doubtful debts (-A) account?

Answer 12

an estimate of the percentage of TR that is not expected to be collected

Question 13

What happens if a business raised an allowance in the prior year, and now a debt owed back then goes bad, the bad debts expense has already been reported, so what is the reversing JE?

Answer 13

DR Allowance for doubtful debts (-A)

CR Trade Receivables (A)

Question 14

However, if more debts from back then go bad than the allowance raised, how is the underestimate treated (with the JE)?

Answer 14

The same way as a bad debt for sales in the current year: DR Bad debts expense (P/L)
CR Trade receivables (A)

Question 15

What happens if the prior year’s allowance was overestimated?

Answer 15

The adjusting entry to set the allowance at year-end should take any remaining balance into account

Question 16

What happens if the bad debts exceed the balance on the allowance account (give the JE)?

Answer 16

DR Allowance for doubtful debts (-A)
DR Bad debts expense (P/L)
CR Trade receivables (A)

Question 17

Give the journal entries for a debtor whose debt was written off in the past and somehow finds the money and pays:

Answer 17

DR Trade receivables (A)
      CR Bad debts recovered income (P/L)
(Reinstatement of debtor)
DR Bank (A)
      CR Trade receivables (A)