# Q1 a) Explain the methods that

Q1 a) Explain the methods that can estimate bad debt expenses inbusiness. (Give numerical examples)

Q2. Differentiate between Accounts receivable and Notesreceivable.

Q3. . Distinguish between Current/Short term Liabilities andNon-current/Long term Liabilities. Illustrate your answer withjournal entries as examples.

A1) The Bad Debts can be estimated using sales approach, using %of total sales of a business for the period, or % of accountsreceivable method.

Percentage of Accounts receivable method

Business estimates the value of bad debts b calculating bad debsas a % of accounts receivable balance

For example, if year-end accounts receivable balance of thebusiness is \$50,000, as per historical records it is 5% of totalaccounts receivable become uncollectable, here allowance for baddebts \$2500 of (5%50000). However business should also create agingschedule estimate bad debts

Percentage sales method

This method calculates bad debts as % of total of credit saleswhich is uncollectable . past experience with the customer and theanticipated credit policy to calculate the %.

Then multiple the % with credit sales to estimate bad debtexpense.

Example, this year the net sales for the business was \$100000and 5% as per credit policy considered as uncollectable. Here,\$5000 would be bad expense.

A2)

Main differences between note receivable and accountsreceivable:

Both are line items of the financial statements and fall underthe same head CA- current asset; there exist some fundamentaldifferences between them.

a) concept :

Notes receivables are written promissory note extending line ofcredit to other party, receivable in the future at a specified datealong with interest.

while, the money owed by customers for purchasing goods orservices on credit is known as accounts receivable.

b) Time-period:

Notes receivables is either a current asset or a non-currentasset. If it matures within one year period, it is reported undercurrent assets. If it is payable a period of more than one year,the portion maturing within one year will be reported under currentassets and the rest of the amount will be reported undernon-current assets.

Accounts receivable is current asset, the amount is mostlypayable within twelve months of issuance of invoice. normally, atime period of thirty to ninety days is provided to clear thedebt.

c) Legal impact:

Note receivables is legally binding agreement between the issuerand the payee.

Accounts receivable, , has no written agreement between thebuyer and customer. The only document available is the salesinvoice.

d) Transferability:

Notes receivables are negotiable instrument & can betransferred further to clear dues. It needs to be highlighted, thatthe transferability doesn’t affect the ownership of a notesreceivable as each bearer has exactly the same claim over it as theoriginal lender had.

Accounts receivable can be sold to a financial institution for afee. This is known as discounting or factoring accounts receivable.Accounts receivable can’t be used as a negotiable financialinstrument like note receivable.

e) Financial cost involved:

Notes receivables are financial instruments that has an interestcomponent attached to it.

Accounts receivables has no financial component attached toit.

A3)

Current Liabilities: obligations which are duewithin one year. These types of liabilities are generally paid withcurrent assets. Some examples include accounts payable, which areamounts due to vendors, shortterm bank loans, employee benefitsetc.

Example: Dr Purchases A/C                               3,500

Cr Accounts PayablesA/C                                             3,500

( purchases done on credit)

Dr Accounts PayablesA/C                                   3,500

Cr CashA/C                                                               3,500

( credit purchases paid)

Non current/long-term liabilities: these aredebts of the business that are due beyond one year. Long-term debtis an example of a long-term liability and may include: leases,bank notes, bonds payable, and mortgage loans. Other examples oflong-term liabilities include: pension benefit obligations anddeferred taxes etc.

Examples: Dr Bank      A/C                        3,500,000

Cr 10% Notes PayablesA/C                                             3,500,000

( cash received through bank on10% notes payable )

Dr Interest payable    A/C                        3,500,000

Dr 10%Notes payables   A/C                           350,000

Cr BankA/C                                             3,850,000

(10%notes payable paid along with interst)

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