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Zupo has a business selling electronic gadgets to retail outlets. He offers 60 days credit to his customers. On 30 June 20X3, he has the following trade receivables and allowance for receivables:
Trade Receivables Account
DR CR
Narrative $ Narrative $
Balance b/d 310,000 Bank 1,240,000
Sales 1,250,000 Balance c/d 320,000
1,560,000 1,560,000
Allowance for Receivables
DR CR
Narrative $ Narrative $
Balance b/d 12,400
Zupo has yet to write off an irrecoverable debt of $8,700 and to update the allowance for receivables based on the same policy as previous years.What will be included in current assets for receivables in the Statement of Financial Position? $ _____
The correct answer is $ 298,848.
Updated trade receivables balance after writing off the irrecoverable debt of $8,700 is $311,300 (= $320,000 ? $8,700). The policy based on last year is to provide for 4% of trade receivables (($12,400 ÷ $310,000) × 100). Thus the updated allowance is 4% × $311,300 = $12,452, an increase of $52 (= $12,452 ? $12,400).
The balance shown in the financial statements is $311,300 ? $12,452 = $298,848
I don’t understand how they found the percentage of 4% for Allowances. Nothing about this was mentioned in the relevant chapters on ACCA study hub, Kaplan or BBP Books.
Please help!
At the end of last year (so start of this year) the balance on receivables was $310,000 and the balance on the allowance for receivables was $12,400. That means that the allowance at the end of last year was 12,400/310,000 = 4%
At the end of this year they can have an allowance of whatever % they want, but the question specifically says that they want to base it on the same policy as last year. So this year the allowance will be 4% of the receivables at the end of this year.
Have you watched my free lectures on irrecoverable and doubtful debts? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
So the formula for finding allowance percentage (if not given in the question) is last year’s closing allowances divided by last year’s closing receivables, and we will always use this method to solve such questions, right?
What you do in questions depends on the wording.
However this question specifically says that are using the same policy as the previous year, which means calculating what % was used last year and then using the same % this year.
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