Task 1 i. The allowance account is a contra account to accounts receivable, the actual bad debts of $35,000 are debited to the allowance account as they are written off. The expense recorded in the statement of comprehensive income therefore represents the balance-day adjustment upon assessment of the recoverability of the accounts receivable.

Journal entry:
Allowance for Doubtful Debts Dr $45,000
Account Receivable Cr $45,000

In determining cash receipts from customers under the direct method, the balance of the Allowance for Doubtful Debts account must not be netted off against the account receivable balance. Otherwise, both cash received from customers and cash paid for expenses will be mis-stated.

Journal entry:
Bad and doubtful debt Dr $35,000
Allowance for Doubtful Debts Cr $35,000

As is shown above, the bad debt expense should be ignored, since it is a book entry only and cannot be converted to a cash-basis expense.

In the note showing reconciliation of net cash from operating activities to profit (indirect method), both the bad debts write-off of $35,000 and the increase in allowance for doubtful debts of $45,000 are taken into account automatically by the increase in the gross accounts receivable balance and the increase in the allowance for doubtful debts can be disclosed separately.

ii. Depreciation expense is a non-cash item, which is included in the statement of comprehensive income and does not cause cash flows. It is therefore excluded from cash from operating activities.
Journal entry:
Depreciation Expense Dr $75,000
Accumulated Depreciation Cr $75,000

iii. As it is a disposal of an item of plant, which is a non- current assets, this transaction is an investing activity. The only cash flow resulting from the disposal of the