Tutorial 1

A) Bank Reconciliation
Discussion questions
1. ‘Although the process of bank reconciliation provides a measure of control
over cash in a business entity, bank reconciliation is useless unless it
operates within a framework that incorporates essential elements of a good
internal control system.’ Discuss this statement.

(Just relying on a bank reconciliation statement does not mean that all cash
have been banked accurately in full amount but with a good internal control
system, it can be ensure that all cash is received, authorised and banked.
Having said that, using bank reconciliation is useful is maintaining control over
payments.)

2. A manager of a small online business believes that because most of the

transactions take place using electronic transfer of funds rather than cash or
cheques, the business no longer needs to do a bank reconciliation each
month. Explain to the manager why a bank reconciliation is still necessary for
the business.

(It is still necessary as there might still be other transaction involving cash.
Also with electronic transfer, it might process overnight and transaction only appear
on the next day, there might also be errors such as interest being wrongly charged or
transaction into wrong accounts.)
Exercise 11.6
Lisa Ceja is unable to reconcile the bank balance at 31 January. Lisa’s reconciliation
is as follows.

Required
a) Prepare a correct bank reconciliation.
b) Journalise the entries required by the reconciliation.

a) Balance as per bank statement $3660.20

Add: Deposit in transit $530.00
4190.20
Less: outstanding cheques ($930.00)
Adjusted bank balance $3260.20
----------------
Cash balance per books $3875.20
Less: NSF Cheque $(590.00)
Bank service charge $(25.00)
Adjusted cash balance per books $3260.20

b) DR CR
Accounts receivable $590.00
Cash $590.00

Bank fees expense $25.00

Cash $25.00
 Exercise 11.8

The following information relates to the cash position of Cathy Fraser, loan broker.
1. Cash at Bank account balance as at 30 June 2019: $45 451 debit.
2. Bank statement balance as at 30 June 2019: $47 512 credit.
3. 30 June receipts amounting to $1820 have not been deposited.
4. Cheques issued but not presented total $3468.
5. A $312 cheque was returned marked ‘dishonoured’. The cheque had been
received from J. Simms, a new customer.
6. A $750 deposit made by L. Richards was incorrectly credited to the bank account
of Cathy Fraser.
7. The bank statement shows that the bank has charged the business’s account with
fees and charges of $25.
8. Items 4, 5, and 6 have not yet been entered in the cash journals.

Required
(a) Prepare a bank reconciliation at 30 June 2019, assuming that items 4, 5, and 6
are already recorded in cash journals.
(LO3)

a) Balance as per bank statement $47512.00

Add : Deposit in transit $1820.00
$49332.00
Less: outstanding cheques $3468.00
Less : Deposit incorrectly credited $(750.00)
Bank balance as at 30 June 2019 $45114.00
--------------
Cash at bank balance $45451.00
Less: Bank Fees $(25.00)
Dishonoured Cheque (J Simms) $(312.00)
Adjusted Cash at bank balance $45114.00
as at 30 June 201
 B) Accounts receivables

Discussion questions

3. ‘The determination of the appropriate amount of the allowance for doubtful

debts is a fairly complicated and onerous process. The method of determining
the amount of the allowance by using a percentage of net sales is the obvious
way to do it.’ Discuss.

The percentage of credit sales approach to measurement, if based on past

experience and a consideration of current economic condition, is simple to apply and
probably less costly and time-consuming than the ageing of accounts receivable
technique.

*Ageing of accounts receivable technique – how long account is overdue

A business student was heard to make the following remark: ‘With the advent
of credit cards and the existence of factor businesses, it now possible for
business entities to offer extensive credit facilities to customers without having
to worry about accounting for accounts receivable and all the problems that it
brings. Carrying one’s own accounts receivable will become a thing of the past.’
Discuss.

Credit cards gives business the chance to avoid maintaining their credit facilities,
however they can also be used to earn interest on receivable balance from overdue
account. For a business entity to have their own credit facilities to customers, it must
also incur additional costs; accounting, establishment and collection costs.

The use of credit cards by customer

Exercise 12.1 (did in class)
Bad debts — direct write-off and allowance methods
Non-GST version

Centenary Ceramics deals in ceramic pots and figurines. All sales are conducted on
a credit basis and no cash discounts are given. Ignore GST. The following
information was extracted from the accounting records at 30 June 2019.

Required
(a) Assume that Centenary Ceramics uses the direct write-off method of
accounting for bad debts,
i. Show the general journal entry required to write-off the bad debts.
ii. What amount would be shown for bad debts expense in the income
statement at 30 June 2019?
iii. What amount would be shown for accounts receivable in the balance
sheet at 30 June 2019?

(b) Assume that Centenary Ceramics uses the allowance method of accounting for
bad debts and the Allowance for Doubtful Debts account had a credit balance
of $2645 at 1 July 2018. Also assume that an allowance of 1% of net credit sales
is required at 30 June 2019 (ignore GST).
i. Show the general journal entries required to write off the bad debts and
bring in the required allowance for doubtful debts.
ii. What amount would be shown for bad debts expense in the income
statement at 30 June 2019?
iii. What amount would be shown for accounts receivable in the balance
sheet at 30 June 2019?
(LO3)
DR CR
Ia) Bad debts expenses $4022.00
Accounts receivable $4022.00

iia) Bad debts expenses $4022.00 – Income Statmeent

iiia) Accounts receivable $190958.00 – Current Assets
Net sales $552000.00 - $37900 – cash collected ($319120.00)
Bad debts written off ($4022) = $190958.00
bi) Allowance for Doubtful Debts $4022.00
Accounts Receivable $4022.00
bii) Bad Debts Expense $4022.00 – Income statement
biii) Accounts receivable $190958.00 – Current Assets
Sales $552000.00
Less: sales return and allowance ($37900.00)
Net sales ( =account receivable) $514100.00
Less: cash collected ($319120.00)
Less: bad debts written off ($4022.00)
Accounts receivable $190958.00
Exercise 12.3
Doubtful debts — net credit sales method
Non-GST version

The following transactions relate to the business of Penrith Produce Ltd. Ignore
GST.

Required
(a) Record the transactions in general journal form.
(b) What is the balance in the Allowance for Doubtful Debts accounts and the Bad
Debts Recovered account? Where are these accounts shown on the financial
statements?
(LO3) DR CR
June 30 Bad Debts expenses $3,300
Allowance for doubtful debts $3,300
(Estimated bad debts expenses)
Oct 5 Allowance for Doubtful Debts $550
Accounts receivable – M. McGrath $550
(M. McGrath – uncollectable)
Nov 15 Accounts receivable – M. McGrath $242
Bad Debts recovered $242
(M. Mcgrath recovered debt in part)
 Cash at bank $242
Account receivable – M.Mcgrath $242
(collected part payment in cash)
Allowance for Doubtful Debts = Current assets -balance sheet balance
$3300-$550 = $2750
Bad debts recovered $242 – Income statement(income)

(M. McGrath – uncollectable)

Nov 15 Accounts receivable – M. McGrath $242
Bad Debts recovered $242
(M. Mcgrath recovered debt in part)

Exercise 12.4
Doubtful debts — ageing method
Non-GST version

On 30 June, the end of its financial year, Burnside Consulting completed an age
analysis of its accounts receivable and determined that an allowance for doubtful
debts of $12 320 was needed in order to report accounts receivable at their
estimated collectable amount in the balance sheet. Ignore GST.

Required
(a) Prepare the entry to record bad debts expense assuming that the Allowance for
Doubtful Debts account currently has a $1940 credit balance.
(b) Prepare the entry to record bad debts expense assuming that the Allowance for
Doubtful Debts account currently has a $820 debit balance.
(c) Prepare the entry to write off an account receivable from G. Smith for $781.
(LO3)

a) DR($) CR($)
Bad Debts expense 10,380
Allowance for Doubtful debts(12,320 – 1940) 10,380
Increase allowance for doubtful debts to 12,320
b)
Bad Debts Expense 13,140
Allowance for doubtful debts 13,140
(Increase allowance for doubtful debts from 820 debit 13,140
To 12,320 credit)

c)
Allowance for Doubtful Debts 781
Accounts Receivable – G. Smith 781
(write off amount owing by G. smith)
Problems
Problem 12.8
Doubtful debts — percentage of debtors

Non-GST version
Karen Broderick commenced business on 1 July 2018. On 30 June 2019, she found
that she had written off debts amounting to $1875. In addition, she found it
necessary to create an allowance for doubtful debts of $3030. During the year to 30
June 2020, debts totalling $2400 proved to be bad and were written off, and $330
was recovered in respect of bad debts previously written off. The total of debtors’
balances at 30 June 2020 was $84 300 (after the bad debts had been written off)
and it was decided to increase the allowance for doubtful debts to 5% of this figure.
Ignore GST.

Required
(a) Prepare general journal entries to record all of the transactions.
(b) Prepare the Bad Debts Expense account and the Allowance for Doubtful Debts
account for 2019 and 2020.
(LO3)