Joy is a sole trader and a regular customer of Sopuruchukwu Enterprises. Mr. Sopuruchukwu manages his business with his child, who recently gained admission to study Law at the University. The firm prepares its accounts to 31 December every year. On 3 April, 2017, Joy bought inventory amounting to ₦120,000 from Sopuruchukwu Enterprises. He promised to pay the invoice issued to him for the transaction on 1 May 2017. On 2 May, Joy became critically ill, and the illness began to affect him mentally. As at 31 December 2019, Sopuruchukwu Enterprises' efforts to reach the family of Joy proved abortive. Mr. Sopuruchukwu did not correctly verify Joy's shop's location because he felt that she had never defaulted in making timely payments for goods sold to her. It is the policy of Sopuruchukwu Enterprises to write off unpaid debts for more than one year.
On 31 March 2020, a relative of Joy called Sopuruchukwu Enterprises on the phone. After apologising for the delay in payment for Joy's inventory, he requested that the account details of the Enterprise be sent to his phone. He also informed Mr. Sopuruchukwu that his brother was getting better. Eventually, payment of ₦120,000 was made by the relative on 2 April 2020. The money was received through the bank account of Sopuruchukwu Enterprises.
Required:
i. Advise the seller on what to do now that Joy's relative has paid the written-off debt on 31 December 2019.
ii. In Sopuruchukwu Enterprises' books, prepare the accounts to post your advice to the seller. Assume that Joy is the only customer of Sopuruchukwu Enterprises.
iii. Also, for the year ended as at 31 December 2020, prepare extracts of the statements of profit or loss and financial position, respectively.
Suggested answer to practice activity 6.14
i. Advice to the seller on what to do as Joy’s relative has paid the debt that Sopuruchukwu Enterprises wrote off on 31 December 2019:
Having treated the amount of inventory sold to Joy as bad debt in the statement of profit or loss for the year ended 31 December 2019, Sopuruchukwu Enterprises should account for the recovery of the debt from Joy (through her relative) by:
Restoring the history of the debt of ₦120,000 that was written off on 31 December 2019 to Joy’s account in the sales ledger.
Posting the restoration of the debt of ₦120,000 accrued by Joy to the bad debt recovered account.
Posting the receipt of ₦120,000 into the cash book of Sopuruchukwu Enterprises.
Deducting the amount of ₦120,000 from the customer (that is, Joy’s account) in the sales ledger.
ii. The Books of Sopuruchukwu Enterprises
Sales ledger
ii. The Books of Sopuruchukwu Enterprises
After restoring the debt accrued by Joy that Sopuruchukwu Enterprises wrote off, the receipt of ₦120,000 through the bank account of Sopuruchukwu Enterprises can now be accounted for as follows.
The balance on the bad debt recovered account is posted to the bad debt account to close the ‘bad debt recovered account.’
iii. The Books of Sopuruchukwu Enterprises
The Books of Sopuruchukwu Enterprises
The bad debt recovered account can also be shown as follows:
Whichever approach a business enterprise uses to record the bad debt recovered account, the effect on the financial statement is the same.
Comments