allowance for impairment of trade receivables

Question 1

define allowance for impairment of trade receivables

Answer 1

refers to the estimated amount of debts that are likely to be uncollectible

Question 2

formula for allowance for impairment of trade receivables

Answer 2

estimated percentage x ending trade receivables balance

Question 3

why businesses need to account for allowance for impairment of trade receivables

Answer 3

at the end of each period, business should review tr balance to estimate amount of debts likely to be uncollectible and record it as allowance for impairment of trade receivables.

this to ensure that tr balance is not overstated and reflects the net amount that is collectible.

this is in accordance to prudence theory, which states that assets and profits should not be overstated and expenses and losses should not be understated.

Question 4

impairment loss on tr

Answer 4

refers to change in allowance for impairment of tr

Question 5

why business to account for impairment loss on tr

Answer 5

the matching theory states that expenses incurred must be matched against the income earned in the same period to determine the profit for the period.

hence the business will record the change in allowance as impairment loss on tr in the same period a credit sales was earned.

Question 6

increase in allowance for impairment of TR and impairment loss on TR

Answer 6

other expenses: increase
profit: decrease
current assets (trade receivables): decrease

Question 7

decrease in allowance for impairment of TR and impairment loss on TR

Answer 7

other expenses: decrease
profit: increase
current assets (trade receivables): increase

Question 8

journal entries for increase in allowance/ preparing for 1st time

Answer 8

dr impairment loss on TR
cr allowance for impairment of TR

Question 9

journal entries for decrease in allowance

Answer 9

dr allowance for impairment of TR
cr impairment loss on TR

Question 10

journal entries for writing off full amount

Answer 10

dr allowance for impairment of TR
cr TR-name

Question 11

journal entries for partial payment/remaining amount written off

Answer 11

dr cash at bank/ cash in hand
dr allowance for impairment of Tr
cr TR-name

Question 12

presentation in financial statements

Answer 12

statement of financial performance
less: other expenses
for increase of allowance, impairment loss on TR
for decrease in allowance, reversal of impairment loss on TR

statement of financial position
current assets $ $
TR Y
Less: Allowance for impairment of TR Z Y-Z