- This topic has 12 replies, 5 voices, and was last updated 4 years ago by
.
- Posts
Joaquin runs a fruit and vegetable business. At 31 September 2009, the balance on his receivables ledger is 42990. He identifies the following:
-a customer, Carmen, has gone bankrupt owing $ 3100
-Luis owes $2000 which Joaquin wishes to make a 75%allowance against.
-general allowance of 2% is to be maintained.What receiveable balance is posted to SOFP at 31 September 2009 ?
I solved this in this was
Receivables 42990
Irrecoverable Debts (3100)
Specific Allowance 2000*75% (1500)General Allowance 38390*2% (768)
Receievables posted to SOFP 37622
In the actual answer General Allowance is calculated by using the original recievables balance minus irrecoverable debts. Specific allowance is left in the amount.
My question is how do you calculate general allowance ? And is how I solved it right ?
From what I understood from Mr. John’s lectures is that General Allowance is always calculated using the original receivables balance (42990×2%) I hope to however be corrected if this is wrong
The general allowance is always calculated after removing any irrecoverable debts and after removing any debts on which there is a specific allowance.
So for this question, the general allowance is 2% x (42,990 – 3,100 – 2,000) = 757.8
(When calculating the general allowance you remove the whole of the debt on which there is a specific allowance (2,000) not just the amount of the specific allowance. The reason is that if you thought there was going to be a problem with the remaining 500 then you would have have a bigger specific allowance 🙂 )The specific allowance is 75% x 2,000 = 1,500.
So the total allowance = 1,500 + 757.8 = 2,257.8
The receivables balance is 42,990 – 3,100 = 39,890
The net receivables figure (receivables – allowance) is 39,890 – 2,257.8 = 37632.2
(One thing to always be careful about is whether or not the irrecoverable debts has already been removed during the year. The wording in this question suggests that it is only discovered at the end of the year and therefore had not already been removed).
It puzzles me that you have the question without an answer. If the book you are studying from does not have answers then you really should use a different book!!
Also, have you watched our lectures? Our free lectures comprise a complete course for Paper F3 and cover everything you need to be able to pass the exam well.
Thank you so much for your prompt reply. This was life saving.
The book I am studying from does include answers but I forgot to include it in the question.
Yes, I have been using open tuition for sometime now.
Hey john,
Following is the question, could you tell me what is the treatment of bad debts if already In allowance. Should we charge them again in SOP&L. ThanksAt the beginning of the year, the allowance for receivables was $850. At the year-end, the allowance required was $1,000. During the year $500 of debts were written off, which includes $100 previously included in the allowance for receivables.
-s
What is the charge to statement of profit or loss for receivables expense for the year?Hey john,
In the following question, could you tell me why wouldn’t we deduct bad debts from receivable to get allowance for receivable. In solution they get 3% allowance of 420000.At 1 January 20X4, Tartar Co had total receivables of $380,000. A specific allowance of $20,000 had been made for a business customer, Drab. The general allowance for receivables was 2.5%. During the year, Drab went out of business owing Tartar Co $28,000, none of which is expected to be recovered. At 31 December 20X4, Tatar had total receivables of $420,000. There were no specific allowances but the general allowance for receivables was increased to 3%.
What is the charge in the statement of profit or loss for the year to 31 December for the allowance for receivables and irrecoverable debts?First question:
There is more than one way of dealing with it, but the final balances are the same – it doesn’t matter how they are arrived at.
However the easiest, safest, and quickest way (and the way I go through in the free lecture) is always to write of irrecoverable debts directly to the irrecoverable debts expense account (whether or not in had previously been allowed for).
So the answer to your question is that the total expense is the cost of the debts written off (500) plus the change in the allowance (1000 – 850). This gives a total expense of 650.
Second question:
The wording of the question implies that the irrecoverable debts had been written off during the year and therefore the balance at the end of the year of 420,000 was already after having removed them.
If, on the other hand, the question had said that the irrecoverable were discovered only at the end of the year, then you would have to remove them from the balance given at the end of the year.
Thanks john if you don’t mind I need a bit more explaination on 1st question.
1 Since we already have allowance which means we already debited SOPL.
Why we’ll charge them again. I mean we had allowance for $100 which we debited expense A/c. If we debit expense A /c with 500 that will sum up $600. Thanks
If you want (but it makes things more confusing in a full question) then you can write off the 100 irrecoverable debt against the allowance (so not charge it as an expense). So only the remaining 400 would be charged as an expense.
However that would then reduce the original allowance to 750 (850 – 100).
Then the cost of increasing it to the 1000 required at the end of the year would be 250 (1000 – 750).So the total expense is then 400 + 250 = 650. Exactly the same as before 🙂
Hey Sir,
In this question Newell’s receivables ledger account shows a balance at the year end of $58,200 before making the following adjustments:
1- Newell wishes to write off debts amounting $8,900 as he believes they are irrecoverable.
2- He also wishes to make specific allowance for Carroll’s Debt of $1,350 and Juff’s Debt of $750.
3- He also wishes to maintain general allowance of 3% of the year and receivables balance.Newell’s allowance for receivable at the year end was $5,650
What is the charge to the Income Statement?
Kindly answer meWhy on earth are you wasting your time by attempting questions for which you do not have answer? You should be using a Revision Kit from one of the ACCA approved publishers – they have answers together with the workings.
Also, why have you not watched my free lectures on irrecoverable and doubtful debts? If you had then you would find this question easy. The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
The allowance required at the end of the year is a specific allowance of $2,100 plus a general allowance of 3% x (58,200 – 8,900 – 2,100) = $1,416
Therefore the existing allowance of 5,650 needs reducing by 5,650 – 1,416 = 4,234
Therefore the expense for the year is 8,900 – 4,234 = $4,666
Incidentally, we do not use the term “Income Statement” and it will not be called that it the exam. It was changed by an IFRS several years ago to “Statement of Profit or Loss” 🙂
Similarly we do not refer to the “Balance Sheet” any more, it has a different name 🙂 🙂
- You must be logged in to reply to this topic.