9. Impairment loss on trade receivables Flashcards
Why does business create allowance for impairment of TR?
In adherence to prudence principle, business must account for possible loss arising from possible default of payment by trade receivables
What does allowance for impairment of TR balance refer to?
Debts which business deems to be irrecoverable
How does allowance for impairment of TR affect TR balance?
Allowance for impairment of TR will reduce TR balance.
State the principle which requires businesses to provide for allowance for impairment of TR
Prudence Principle
Other than prudence principle, state and explain another principle which requires allowance for impairment of TR to be accounted for.
Matching Principle - if the doubtful debt arises from current year’s credit sales, this possible loss must be matched against the current year income.
On 31 July, debts owed by Willy $500 was deemed to be irrecoverable. Give the double entries to account for this possible irrecoverable debts given that business does not have any existing allowance for impairment of trade receivables.
Dr Impairment loss on TR $500
Cr Allowance for impairment of TR $500
The books of W showed allowance for impairment of TR $560 on 1 Jan 2016. On 31 Dec 2016, the business deemed debts owing by Elva, $300 and by Alice, $360 to be irrecoverable. Give the double entries to adjust the allowance for impairment of TR.
Dr Impairment loss on TR $100
Cr Allowance for impairment of TR $100
[biz needs $300+$360 as allowance but already has $560. Thus, it needs to increase by only $100]
The books of H showed allowance for impairment of TR $520 on 1 Jan 2016. On 31 Dec 2016, the business deemed debts owing by Richard, $280 and by Stanley, $160 to be irrecoverable. Give the double entries to adjust the allowance for impairment of TR.
Dr Allowance for impairment of TR $80
Cr Impairment loss on TR (reversal) $80
[biz has existing $520 but needs only $280+$160 at end of the year. Thus, need to reduce allowance by $80]
Eric started business on 1 April 2015. On 18 Nov 2015, he wrote off a debt $180. On 31 March 2016, Eric had debts of $260 which he deemed as irrecoverable.
Show the double entries to record the impairment loss on 31 March 2016.
Dr Impairment loss on TR $440
Cr Allowance for impairment of TR $440
[as there were no existing allowance, at year end, other than writing off the $180, biz will need to have allowance of $260; thus, biz need to account for $180 loss + $260 possible loss]
Shane decided to write off debts of $240 owed by Mary. Give the double entries to record the write off.
Dr Allowance for impairment of TR $240
Cr TR Mary $240
Peter’s books on 1 May 2016 showed allowance for impairment of TR, $228. During the year, he wrote off Tom’s debt of $180. On 30 April 2017, debts of $165 was deemed to be irrecoverable.
Give the double entries to write off the debt and adjust the allowance for impairment of TR
Write off:
Dr Allowance for impairment of TR $180
Cr TR Tom $180
Dr Impairment loss on TR $117
Cr Allowance for impairment of TR $117
Shirley increase the allowance for impairment of TR by $280. How will this affect the profit for the year?
Increase in allowance for impairment of TR means that there will be an impairment loss on TR of $280. Profit will reduce by $280.
Howard reduce the allowance for impairment of TR by $58. How will this affect the profit for the year?
Reduction in allowance for impairment of TR means there is a reversal of impairment loss on TR of $58. Profit will increase by $58.
Is allowance for impairment of TR shown in the income statement?
No. Allowance for impairment of TR is shown in the Balance Sheet as a deduction from TR.
State the type of balance in the allowance for impairment of TR account. Explain why.
Allowance for impairment of TR has a credit balance because it is a contra asset account.
