|
Contents:
When a
person's liabilities are more than his assets and he is
not in a position to pay all of his debts when they
become due. Such a person is called insolvent.
When a
person or party is declared by court as insolvent or
bankrupt he is considered to be unable to pay his
liabilities. It means, the bills accepted by him
will be naturally dishonored. Therefore, when it is
known that a person has become insolvent, entry for
the
dishonor of the bill of exchange should be
passed both in the books of the drawer and acceptor.
When a person becomes
insolvent, his private property, if he has any, is
sold by a liquidator appointed by the court.
Something may be received from his estate. Thus
after passing entries for dishonor, we should
prepare acceptor's account in the books of the
creditor (drawer).
The acceptor's account
in the books of the drawer will disclose the net
amount dew from him. Generally the amount received
from the estate of insolvent party is less than the
amount due from him. The unsatisfied balance is
treated as bad debts and debited to "bad debts"
account in the books of the drawer and credited to
"deficiency account" in the books of the drawee.
On the insolvency of
drawee, the following entries are passed in books of
both the parties:
|
In drawer's
Books |
In Drawee's
Books |
|
1. Entry for
dishonor:
Bills
receivable A/C........XXX
Drawee's A/C..................XXX
2. When
final dividend is received:
Cash
A/C.................XXX (with actual
amount received)
Bad debts A/C.........XXX
(unsatisfied amount)
Drawee's A/C................XXX (full amount) |
1. Entry for
dishonor:
Bill payable
A/C........XXX
Drawer's A/C..................XXX
2. When
final claim is paid to the creditor:
Drawer's
A/C..............XXX
Cash A/C.........................XXX
Deficiency A/C................XXX |
A sold goods to S
worth $20,000, taking a bill of exchange at 3
months, dated 1st July 2005. On the 4th august he discounted the bill at 15% p.a. with his
bank. At maturity the bill was returned by the bank
dishonored and A had to pay the bill. S paid $8,000
to A and accepted another bill at three months
$12,000 and 14% interest. But, before maturity, he
became insolvent and only 50% was received as first
and final dividend form his estate.
Required:
Give journal entries in the books of A and S.
Solution:
A's Journal
|
Date |
Particulars |
L.F |
Amount (Dr.) |
Amount (Cr.) |
|
1.7.2005 |
S
A/C................................................Dr.
Sales A/C
(Goods sold on credit basis) |
|
20,000 |
20,000 |
|
1.7.2005 |
Bill
receivable
A/C...............................Dr.
S A/C
(Acceptance received at three months) |
|
20,000 |
20,000 |
|
4.8.2005 |
Bank
A/C...........................................Dr.
Discount
A/C......................................Dr.
Bill receivable A/C
(Bill discounted at 15% two months before
its maturity) |
|
19,500
500 |
20,000 |
|
4.10.2005 |
S
A/C................................................Dr.
Bank A/C
(Old bill cancelled and amount paid to bank
due to acceptor's inability) |
|
20,000 |
20,000 |
|
4.10.2005 |
Cash
A/C..........................................Dr.
S A/C
(Cash received from acceptor as a part
payment) |
|
8,000 |
8,000 |
|
4.10.2005 |
S
A/C...............................................Dr.
Interest A/C
(Interest due from acceptor on the
outstanding balance for 3 months) |
|
420 |
420 |
|
4.10.2005 |
Bill
receivable
A/C..............................Dr.
S A/C
(A new bill received at 3 months) |
|
12,420 |
12,420 |
|
|
S
A/C...............................................Dr.
Bill receivable A/C
(Bill dishonored due to acceptor's
insolvency) |
|
12,420 |
12,420 |
|
|
Cash
A/C.........................................Dr.
Bad debts
A/C..................................Dr.
S A/C
(Cash received from estate of acceptor and
the balance written off as bad debts) |
|
6,210
6,210 |
12,420 |
S's Journal
|
Date |
Particulars |
L.F |
Amount (Dr.) |
Amount (Cr.) |
|
1.72005 |
Purchases
A/C.....................................Dr.
A A/C
(Goods purchased on credit) |
|
20,000 |
20,000 |
|
1.7.2005 |
A
A/C.................................................Dr.
Bill payable A/C
(Acceptance given at three months) |
|
20,000 |
20,000 |
|
4.10.2005 |
Bill payable
A/C...................................Dr.
A A/C
(Bill cancelled for renewal purpose) |
|
20,000 |
20,000 |
|
4.10.2005 |
A
A/C.................................................Dr.
Cash A/C
(Cash paid as part payment) |
|
8,000 |
8,000 |
|
4.10.2005 |
Interest
A/C.......................................Dr.
A A/C
(Interest payable to the drawer) |
|
420 |
420 |
|
4.10.2005 |
A
A/C................................................Dr.
Bill payable A/C
(New acceptance given at 3 months) |
|
12,420 |
12,420 |
|
|
Bill payable
A/C.................................Dr.
A A/C
(Bill dishonored due to insolvency) |
|
12,420 |
12,420 |
|
|
A
A/C...............................................Dr.
Cash A/C
Deficiency A/c
(Dividend of 50 cents in a dollar paid and
balance transferred to deficiency account) |
|
12,420 |
6,210
6,210 |
|
