Insolvency of Acceptor in Bills of Exchange

Insolvency of Acceptor in Bills of Exchange:

Learning Objectives:

  1. How the matter is treated in accounting for bills of exchange when the drawee becomes insolvent?

Insolvency of a person means that he is unable to pay his liabilities. This will mean that bill accepted by him will be dishonoured. Therefore, when it is known that a person has become insolvent, entry for dishonour of his acceptance should be passed, Later something may be received from his estate.

When amount is received, the following journal entry is passed:

Cash Account [Dr.]
To Debtor’s Personal Account [Cr.]

The remaining amount will be irrecoverable and therefore, should be written off as a bad debt.

Example:

On 1st January, 1991. A drew and B accepted a bill at 3 months for $1,000. On 4th January, 1991, A discounted the bill at his bank at 6 percent per annum and remitted half the proceeds to B. On 1st February, 1991. B drew and A accepted a bill at 3 months for $400. On 4th February, 1991, B discounted the bill at 6 percent, per annum and remitted half the proceeds to A. A & B agreed to share the discount equally.

At maturity A met his acceptance, but B failed to meet his and A therefore had to pay the bill. A drew and B accepted a new bill at 3 months for the amount of the original bill plus interest at 6% per annum. On 1st July, 1991,B became insolvent and only 50 cents in a dollar were received from him.

Record the above transactions in A’s journal and write up B’s account.

Solution:

Journal Entries in the Books of A

1991 Bills receivable account 1,000
Jan. 1      To B 1,000
(Bill drawn on B)

Jan. 4 Bank Account 985
Discount account 15
     To Bills receivable account 1,000
(Bill discounted)

B 500
     To Bank account 492.5
     To Discount account 7.5
(Half the proceeds remitted to B)

Feb. 1 B 400
     To Bills payable account 400
(Acceptance given)

Feb. 4 Cash account 197
Discount account 3
     To B 200
(Half the proceeds received)

April 4 B 1,000
     To Bank account 1,000
(Bill dishonoured)

Bills payable account 400
     To Cash account 400
(Bill met)

B 15
     To Interest account 15
(Interested charged)

Bill receivable account 1,015
     To B 1,015
(A new bill drawn)

July 1 B 1,015
     To Bills receivable account 1,015
(Bill dishonoured)

Cash account 357.5

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