Lecture 5: Accounting for Irrecoverable Receivables, Taxation and Dividends.

Question 1

Recoverability of receivables:

Answer 1

• Accounting rules exist to recognise the fact that companies won’t necessarily collect all the cash from their receivables.

This is an application of the prudence concept.

Question 2

What are irrecoverable debts?

Answer 2

• Are defined as debts which are not expected to be paid.
• Are “written off” as an expense in the statement of profit or loss.
• revenue figure is not altered.
• Shown as administrative expenses.

Question 3

Irrecoverable debts have the following effects on the financial statements:

Answer 3

Increase administrative expenses (irrecoverable debts expense) - statement of profit or loss.

Decrease current assets (trade receivables) - statement of financial position.

Question 4

Allowance for receivables:

Answer 4

• Companies are required to calculate an allowance for receivables for each period which is required by IFRS 9 Financial Instruments.
• Amount set is in relation to the probability of non-recovery debts .

The probability of non-payment is expressed as a %

Question 5

Allowance for Receivables continued:

Answer 5

• Is an expense in the statement of profit or loss.
• Revenue figure is not altered
• Shown under administrative expenses.

Question 6

How is the allowance for receivables displayed in financial statements

Answer 6

Increase administrative expenses - Statement of profit or loss.

Decrease current assets - statement of financial position.

Question 7

How do you determine the probability of non-payment?

Answer 7

• Detailed analysis of the aged receivable listing.
• Use of past trends
• Known payment issues for specific customers?
• Consider changes in the wdier economy.

Question 8

Increase in the allowance for receivables:

Answer 8

Increase administrative expenses by the amount of the increase in allowance.

Decrease current assets by the amount of increase in allowance.

i.e Only the increase is accounted for, to reflect the movement and not for the total allowance.

Decrease is vice versa

Question 9

Accounting for Taxation:

Answer 9

• Company pays corporation tax on its profits.
• A company will estimate its tax liability at year-end.

The actual payment is usually after the year end date therefore will be recorded as a liability in the statement of financial position.

Question 10

What effects does accounting for taxation have on financial statements:

Answer 10

Increase income tax expense - SOPOL

Increase current liabilities - SOFP

Question 11

Accounting for dividends:

Answer 11

Actual payment of dividends is usually after the year-end date so will be recorded as a liability in the statement of financial position.

Question 12

Accounting for dividends when the payment is made after the year-end. Has the following effects on financial statements.

Answer 12

Increase CL (trade payables) - SOFP

Decrease equity (retained earnings) - SOFP

Question 13

What happens if companies pay dividends within the year…

Answer 13

• Will reduce cash and cash equivalents in the statement of financial position.

Question 14

Accounting for dividends when they are paid before year-end date:

Answer 14

Decrease current assets (cash) - SOFP

Decrease equity (retained earnings) - SOFP.