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Irrecoverable debts are $5,000. Trade receivables at the year end are $120,000. If an allowance for
receivables of 5% is required, what is the entry for irrecoverable debts and allowance for receivables in
the income statement?
A $5,000
B $11,000
C $6,000
D $10,750stated correct answer: B $5,000 + (5% * 120,000) = $11,000
I think correct answer is 5000+((120000-5000)*5%)= 10750
Can you help me?
I don’t know where you found this question, but if you have copied it correctly then it is a very poor question!
If the question said that the irrecoverable debts had already been written off during the year, then the answer is correct (the balance on receivables will be after having removed the debt and so the allowance would be 5% x $120,000).
On the other hand, if the question said that the irrecoverable debts were discovered at the year end, then your answer would be correct.
The exact wording can make an enormous difference (and also both answers assume that there was no allowance existing at the start of the year – the expense is the cost of changing the allowance – and so certainly in the actual exam you would be told this!)
I found it in BPP F3 – 2013-2014 , end of chapter 12 Irrecovable debts and Allowances, round up quick quiz.
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 income statement for the year to 31 December for the allowance for
receivables and irrecoverable debts?
A $16,400
B $31,600
C $44,400
D $11,600stated correct answer :
D
$
Specific allowance for receivables at 1 January 20,000
General allowance: 2.5% of (380,000 – 20,000) 9,000
29,000
General allowance at 31 December: 3% of
420,000
12,600
Reduction in allowance for receivables (16,400)
Irrecoverable debt written off 28,000
Combined expense in income statement 11,600also I dont think it’s correct
I only have the current edition of the BPP Revision Kit, and so I cannot help you on your first question.
With regard to your second question, the answer is correct.
Drab went out of business during the year and so it will have been written off during the year.Why are you using the BPP Study Text? Our lectures are a complete course covering everything you need to be able to pass Paper F3 well. The only extra book you need is the Revision Kit, because that contains lots of questions to practice, and practice is vital 🙂
Oh I understand, if it’s occurred during the year we must deduct during the and not in the end.
thank you tutor.
I studied this and previous books from your lectures and I will continue it.
But for practice I am looking through other books, also using BPP revision book. the last question is from that book.thank you for everything.
p.s. hope they will not make such silly misleading questions tomorrow.
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