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Hi John,
This is the question in the Open Tuition book. Thank you, you explained everything in detail but I slightly didn’t understand Ann’s payment. She paid her previous doubtful debt but you credited Receivable and Debited Cash. How about the Allowance for Doubtful Debts Account. It doesn’t have any effect on it? Since the brought down in Allowance account is 12560$ from the previous year so it includes Ann’s payment shouldn’t we reduce it.
During the year ended 31 December 2001, Cilla had made sales on the credit of $261,000 and had
received cash from customers of $238,000.
These amounts had been entered into the Receivables Account, and a balance extracted.
On investigation, the following was discovered:
(a) Paul had paid $2,200 of his previously irrecoverable debt (we do not expect to receive any
more)
(b) George had still not paid the $8,000 owing, and must now be regarded as irrecoverable
(c) Ann had paid her debt of $2,000 in full
(d) Ringo was owing $4,000 which is irrecoverable
(e) Mick was owing $6,000 and is a doubtful debt
(f) It was decided to maintain the general allowance for receivables at 4% of the remaining
debts
(Note: the amounts received from Paul and Ann are included in the total cash receipts for the year
of $238,000)
(a) Write up the Accounts Receivable, Irrecoverable Debts Expense, and Allowance for
Receivables accounts
(b) Show extracts from Cilla’s Statement of Financial Position and Statement of Profit or
LossThere is no need to copy out the question in our lecture notes – I have a copy of them 🙂
(Also you will find it easier to find the videos if you watch them directly from our website 🙂 🙂 )There are two ways you can deal with Ann’s payment, but the way I show in my lecture is by far the quickest and most efficient.
The best way, and the way in the lecture, is to charge the cost as an irrecoverable debt, and then in addition have the cost of changing the allowance from the brought forward figure to the amount required at the end of the year (which will not include Ann, because she is no longer doubtful).
If you prefer, then instead of charging Ann as irrecoverable, you can credit Receivables and debit the Allowance. This will reduce the balance on he allowance account, and therefore the amount needed to get the allowance required at the end of the year will need to be higher by the amount of Ann’s debit. The end result will be the same total allowance at the end of the year and the same total expense on the SOPL.
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