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Question 3 Thomas Solicitors is a GST-registered business based in Sydney

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Question 3

Thomas Solicitors is a GST-registered business based in Sydney. The legal firm uses the percentage of net credit sales method to account for bad debts.

An extract of its balance sheet at 1 December 2021 showed:

Current Assets $

Accounts Receivable 880,000

Less: Allowance for Doubtful Debt (120,000)

Net Receivable 760,000

Accounting records also showed:

• Total net credit sales for the year ended 31 December 2021 amounted to $8,250,000 inclusive GST.

• Cash collections for the same financial year amounted to $7,260,000.

Required:

a. If the business estimated the bad debts for the year at 2% of net credit sales, prepare the general journal to record the adjustment for Allowance for Doubtful Debts at 31 December 2021. [4 marks]

b. If the journal entry in part a. above was NOT recorded, explain how the omission of the journal entry would affect the overstatement/ understatement of Thomas Solicitors’ assets and profit. [3 marks]

c. If management decided that the Allowance for Doubtful Debts account should have a credit closing balance of $170,000 on 31 December 2021, prepare the general journal to record the bad debts written off for the financial year. [6 marks]

d. Prepare Thomas Solicitors’ Accounts Receivable Control ledger account (in T-format) to include the above transactions and close the account for the year. [5 marks]