Year-end cut-off and receivables allowance at a Yangon wholesaler
Shwe Yi Trading Co, a Yangon wholesaler, is finalising its financial statements for the year ended 31 March 2025. The draft profit before tax is 186,000,000 MMK. Draft trade receivables are 145,000,000 MMK and the allowance for doubtful debts brought forward is 7,250,000 MMK. The accountant has already included a general allowance of 5% of closing receivables. During review you find:
- Invoice 18,000,000 MMK dated 28 March 2025 for goods shipped on 2 April 2025, FOB destination; it is included in both sales and receivables.
- A customer owing 9,000,000 MMK entered liquidation on 20 March 2025; the liquidator expects no dividend.
- A different customer owing 6,000,000 MMK signed a 12-month payment plan on 5 April 2025; the accountant proposes to leave it in receivables with no specific allowance.
- Sales include 4,000,000 MMK of goods supplied on sale-or-return; the customer has 60 days to return them and the company has no reliable returns history for this product. The goods cost 2,400,000 MMK and are still held by the customer. The tax rate is 20% and the company uses the accrual basis.
1. Identify the adjustments required and calculate the revised profit before tax and the revised allowance for doubtful debts. State any assumptions.
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Work through each item on an accrual basis.
- FOB destination invoice, 18,000,000 MMK. Control passes on delivery, which is 2 April 2025. At 31 March the goods are still the company's inventory and no receivable exists. Reverse the sale and receivable: profit falls by 18,000,000 MMK.
- Liquidation customer, 9,000,000 MMK. The customer entered liquidation before year-end and no dividend is expected. Write off the receivable. The write-off uses the allowance, so it does not appear as a separate expense in addition to the allowance movement.
- Sale-or-return, 4,000,000 MMK. Revenue should not be recognised where returns are probable and cannot be reliably estimated. Reverse the sale, remove the 4,000,000 MMK receivable and restore inventory at cost of 2,400,000 MMK. Profit falls by the gross margin of 1,600,000 MMK.
- Allowance. Revised gross receivables = 145,000,000 - 18,000,000 - 9,000,000 - 4,000,000 = 114,000,000 MMK. Assume the payment-plan customer will realise 4,000,000 MMK, so a specific allowance of 2,000,000 MMK is needed. General allowance = 5% x (114,000,000 - 6,000,000) = 5,400,000 MMK. Required allowance = 7,400,000 MMK. After the 9,000,000 MMK write-off, the old 7,250,000 MMK allowance becomes a 1,750,000 MMK debit balance. The charge needed to reach 7,400,000 MMK credit is 9,150,000 MMK.
Revised profit before tax = 186,000,000 - 18,000,000 - 1,600,000 - 9,150,000 = 157,250,000 MMK. Revised allowance = 7,400,000 MMK. If the 6,000,000 MMK balance is judged fully recoverable, the allowance and profit would differ; that is the key judgement.
2. Explain whether the 6,000,000 MMK payment plan should be treated as a write-off, a specific allowance, or neither, and how prudence and accrual concepts interact here.
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It should not be written off. A write-off is appropriate only when the debt is no longer an asset, for example because it is legally extinguished or recovery is virtually nil. Here the customer still owes 6,000,000 MMK and has signed a payment plan.
Neither is it automatically left with no allowance. The plan was signed after the reporting date, but it provides evidence about the customer's ability to pay and about conditions that existed at year-end. If the customer was already in financial difficulty at 31 March, the later plan is an adjusting event that confirms the risk. Prudence does not mean creating a hidden reserve; it means not overstating receivables when recovery is uncertain. Accrual accounting still recognises the receivable because the sale occurred. The two concepts interact: keep the asset, but reduce its carrying amount to the expected recoverable amount. On the stated assumption, a specific allowance of 2,000,000 MMK is reasonable. The finance director should document the evidence: correspondence, the payment plan, the customer's financial information and any security.
3. Advise the finance director on the sale-or-return goods and the FOB destination invoice, including the effect on revenue recognition and inventory.
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For the FOB destination invoice, the key question is when control passes. FOB destination means the seller retains risk and control until the goods reach the buyer. The invoice was dated 28 March but shipment was 2 April, so at 31 March there is no sale and no receivable. The entry is to reverse the 18,000,000 MMK sale and the corresponding receivable. Because the goods had not been shipped at year-end, they remain in inventory; the profit reduction is the full 18,000,000 MMK, assuming the related cost was never charged to cost of sales.
For the sale-or-return goods, revenue is recognised only if the buyer has accepted the goods, the amount is measurable and returns can be reliably estimated. The customer has 60 days to return and the company has no reliable history for this product, so revenue of 4,000,000 MMK should be deferred. Remove the receivable, restore inventory at cost of 2,400,000 MMK and reduce profit by the 1,600,000 MMK gross margin. The finance director should also disclose the judgement if it is material. The principle is not to follow the invoice date mechanically; it is to report the substance of the transaction and the economic resources controlled at the reporting date.