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John,
Firstly, I want to thank you for taking the time to answer my questions. I’ve been working on Chapter 19 on BPP revision kit which asks you to create financial stmts based on the info they give you. I have two questions:
1) Inventory Revaluation – Question 19.1 and 19.3 both have inventory revaluations, question 1 accounts for the inventory revaluation in the inventory line item under Current Assets, and then records it again as part of retained earnings as “Inventory Revaluation” Question 3, on the other hand, accounts for the revaluation in the inventory line item as well, but there is no mention of it in retained earnings, when is it included as part of retained earnings? Is there a specific scenario I’m missing?
2) Irrecoverable Debt – I was under the impression that the statement of financial position takes into account irrecoverable debt by deducting it from the receivables and showing the new balance, then under showing the allowance for receivables. In Question 1, they do exactly that, and then account for irrecoverable debt in retained earnings again. In question 3, I can’t find where irrecoverable debts are taken into consideration in the balance sheet? Are they normally shown as part of retained earnings?
Thank you so much for your time and patience.
Rachel
1. In both questions the inventory write-down reduces the inventory in the SOFP and also reduces the retained earnings. In the first question this is shown in the workings for retained earnings. In the second question you are also asked for a SOPL and it is shown in the calculation of the profit – lower profit then means lower retained earnings.
In both cases it is only part of the workings, we only show the final retained earnings on the SOGP itself.2. The same applies to the irrecoverable debt 🙂
John,
I still don’t understand the workings for question 19.3 Irrecoverable debts. Specifically, in my balance sheet I removed the irrecoverable debt from the Receivables of 900 and then underneath had the allowance for doubtful debts line item. In the answer, they just don’t remove the irrecoverable debt. Are you saying that is taken into consideration thru retained earnings since it is accounted for in the SOPL?
Thank you!Since irrecoverable debts appear in the trial balance, the entry to remove them must already have been made (Dr Irrecoverable debts expense Cr Receivables) and therefore we do not remove them again.
(If they had not already been removed then the entry would not have been made and there would therefore have been no balance on the irrecoverable debts account to appear in the trial balance.)
That makes sense! Thank you. Appreciate all your help during the last couple of months. I feel ready to take the exam this Thursday here in Los Angeles. Thanks again, John
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