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  1. Please help!

    ‘An increase in an allowance for receivables of $8’000 has been treated as a reduction in the allowance on the financial statements. Which of the following explains the resulting effects?’

    The correct answer is:

    Net profit overstated by $16’000, receivables overstated by $16’000.

    I understand why they are both overstated but how is the value of $16’000 obtained? I chose the wrong answer: Net profit overstated by $16’000, receivables overstated by $8’000.

    Thank you!

    • If there is an increase in the allowance then it means there should be an expense of 8,000.
      If they had recorded nothing, then the profit would be overstated by 8,000.

      However, then had recorded it as a decrease in the allowance and to they had treated it as a negative expense. So that means an extra 8,000 overstated. In total, 16,000.
      (same for receivables)

  2. Hi John

    I have a question on Test 3-Chapter 8. I understand that the $2.5K from Mike should be deducted from receivables. Very unlikely we will get any of this money. However, for Ken the $1.8K had already been previously written off and not included in receivables. Would this not be a credit to expense? DR CASH CR EXPENSE…

    Thanks

    • You are quite correct.
      However, the question says that the balance at the moment includes that figure, which means that (wrongly) the bookkeeper must have Dr Cash Cr Receivables.
      This is wrong, and so to correct it we need to Dr Receivables Cr Expenses (which is what should have been done in the first place).
      (It is actually a very likely mistake in real life because the bookkeeper might not have know that the debt had been written off and therefore did what we normally do when we receive money from a customer.)

      I know the wording of the question is not so nice, but it was a real exam question.

  3. Dear Sir i a bit confuse about test question 2
    At 31 December 2005 the ledger of X Co. included a $5,376 allowance for receivables. During the year ended
    31 December 2006 irrecoverable debts of $2,040 were written off. Receivables balances at 31 December 2006
    totalled $173,760 and the company wished to carry forward a general allowance of 2%.
    The total charge for irrecoverable debts and change in allowance for receivables in the 2006 income statement is

    my working is 173760 for total Receivable – 2040 bad debts = 171,720
    2% general Allowance on 171,720 = 3,434.40
    Change in Allowance is 5376 for 2005 – 3434.40 for 2006 = 1941.60
    Thus Bad debts 2040 – change in allowance is 1941.60 = 98.40 answer A
    but is the answer for this question it is shown B 139.20.

    Could you please clarify it for me as it is a bit confusing.
    thanks a lot

    • The bit that makes the difference is “During the year ended
      31 December 2006 irrecoverable debts of $2,040 were written off”.
      Because they were written of ‘during the year’ it means that the balance on receivables at the end of the year is already after removing them (so we don’t need to remove them again when calculating the general allowance).

      In test question 1, the wording is different – it gives the receivables figure and says ‘it was then decided to write off…’, so in that question they did need removing from the receivables figure.

      Hope that makes it clear.

  4. Could you explain this question?
    Q) Headiington is owed 搂 37000 by its customer at the start and 搂39000 at the end, of its year ended 31 Dec 2008.
    During the period, cash sales of 搂263000 & credit sales of 搂357000 were made,discount allowed amounted 搂15750 & discount received 搂21400.Irrecoverable debt of 搂10500 were written off & Headington wishes to retain its allowance at 5% of total receivables.

    .The cash received from in the year totalled:
    a) 搂329750
    b) 搂593175
    c) 搂593250
    d) 搂614650

  5. Hi Sir,
    I wanted to ask about test Q1 chapter 8
    why are we subtracting the prev amount of $93600 instead of just leaving the full amount of debts as $146400?

    • The full amount of debts is certainly not 146500! The receivables are 1240800 less the irrecoverable debts of 88,800.

      The question is asking for the expense in the Statement of profit or loss, and the expense is the cost of removing irrecoverables, together with the change in the allowance.

      Have you watched the lecture, because the notes are to be used with the lectures (not on their own) and in the lecture I do explain this point.

    • The question is a little confusing.
      When we receive cash from an irrecoverable then we should Dr Cash and Cr Irrecoverable debts expense.

      When the question says that it has been included in Receivables, it means that we have Dr Cash but Cr Receivables, which is wrong.

      So to correct it we need to Dr Receivables and Cr Irrecoverable debts expense.

  7. Dear Sir,

    I have a question about Question 3 at the end of the Chapter 8.

    Could you please explain why we don’t take into account (4) cash received from John of $2,900 which had previously been allowed for, when calculating revised receivables figure?

    And could you please confirm whether my understanding is correct concerning why we don’t take into the account (2) debts of $500 + $1,500 which are to be specially allowed for – it is because receivables figure should include specific allowance.

    Thank you!

    • When the questions says that the balance includes the four items, it means that the 2,900 has been entered on the account, which is correct.

      We don’t adjust for the debts in (2) because they are only doubtful – so we leave the amount in receivables, but create the allowance for receivables for them.

      • Dear Mr John , would appreciate if you could show the correct answer , and clarify all step with t accounts

      • The correct answer is at the end of the Course Notes (as are all of the answers).
        To show t-accounts really would be wasting time – there is very little testing of t-accounts in the exam.

  8. Hello John,
    Could you please help me understand the difference between Q1 and Q2 ?
    Q1 – AR is decrease by debt write offs:
    ((1,240,800-88,800)*5%)
    whereas in
    Q2 – AR is not decreased by irrecoverable debt write offs:
    (173,760*2%) and not ((173,760-2040)*2%)
    Just trying to find a logic…

    • I assume you are referring to the test questions at the end of the chapter.

      The difference between them is in the wording of the question.

      In question 1, the question says “it was THEN decided to write of debts….: which means that they had not already done so.

      However, in question 2, the question says “During the year…….irrecoverable debts were written off). This means that they have already been removed as irrecoverable.

      I hope that explains the difference, but if you are still unclear then please do post again.

  9. Hi John,

    I’m a little confused over questions 2 and 3 on the end of chapter test.
    Here is how I did question 2:
    2040+((173760-2040)x2%)-5376
    =2040+3434.4+5376
    =98.4 = A (is this the correct method and answer?)

    And question 3:
    1. 50000 – 2500 (irrecoverable debt) = 47500
    2. 47500 – 1800 (previous irrecoverable debt that has now been paid, so it is like negative expense or added income) = 45700 (final answer)

    I don’t know what I’m doing wrong here.

  11. Prof Moffat,

    My question relates to chapter 8, question 1 of the multiple choice questions in the course notes. Can you please explain to me why it is necessary to add back the 88,800. I worked it out and thought I was correct with answer C but when I checked the answer booklet you have to add back the 88,800 to arrive at answer B.

    • We don’t add back the 88,800.

      The expense in the income statement is the cost of writing of irrecoverable debts, together with the cost of changing the allowance for doubtful debts.

      The irrecoverable debts are 88,800. The allowance is reduced by 36,000 – because it is reduced, it is a negative expense.
      So….the overall expense is 88,800 – 36,000.

    • There was no need to do anything.

      The question says that he has paid 1200 and that they don’t expect to receive any more. So it stays written off as irrecoverable.

      (The whole debt was written off in the previous year – this year we just bring in the amount he has paid as ‘unexpected income’, treated as a negative expense.)

  14. sir this question is from bpp text book

    A 1 jan 2004 ,Tartar co had receivables of $380000.A specific allowance of $20000 had been made for a business customer ,Drab.The general allowance for receivables was 2.5%.During the year ,Drab went out of the business owing Tartar co $28000,none of which is expected to be recovered.At 31 dec 2004 ,Tartar had total receivables of $420000.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 dec for the allowance for receivables and irrecoverable debts?

    THE ANSWER IS $11600.

    can you please explain this whole question with double entry and what do you do when the receivables for the year has increased ?

    • At the beginning of the year there was a specific allowance of 20,000 and a general allowance of 2.5% of (380,000 – 20,000) = 9,000.
      So the total allowance was 29,000.

      At the end of the year, the allowance is to be 3% of 420,000 = 12,600.

      So we need to reduce the allowance by 16,400 (29000 – 12,600).

      So the total charge in the statement of profit or loss will be 28,000 (irrecoverable debts) – 16,400 (the reduction in the allowance) = 11,600

      (If you want double entries, then watch my lecture on irrecoverable debts. However doing t’accounts for this question would simply be wasting time. The exam is not really a debit and credit exam – computers do the double entries in practice – the exam tests your accountancy knowledge and the accountants job is to calculate the figures.)

      • Hi prof johnmoffat,
        i though on the bok pg 208 said, we have to remove the total amount of the specific provision from the general provision, and then calculate the general provision based on the figure, but why here we directly deduct the amt of specific allowance rather the provision (i knew the amt is not given in the question, but is this the reason? i’m a bit confused) thank you if you could help me!

      • oops, sorry, on pg 208 of the BPP text book, there’s a sample question,
        XY Co has a balance of recivables of 250000. it wishes to provide a specific allowance of 60% on a debt of 20000. it also wishes to set up a general allowance of 2% or receivables. what is the charge to the income statement?

        in the answer the general allowance is calculated by 2%*230000 (which is total receivables-specific provision 250000-20000, not 250000-12000)

        Thank you!

      • The reason is that since there is a specific allowance of 60% of the debt, it must be that we think that the rest of the debt is no problem. So we only calculate the general allowance on the other debts.

      • what if i change the question like this? which rule i should follow then?since i knew both debt amt and allowance

        ?At 1 jan 2004 ,Tartar co had receivables of $380000.A specific allowance of $20000 had been made for a business customer ,Drab on a debt of 28000.The general allowance for receivables was 2.5%.During the year ,Drab went out of the business,none of its debt is expected to be recovered.?At 31 dec 2004 ,Tartar had total receivables of $420000.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 dec for the allowance for receivables and irrecoverable debts?

        Thank you so much for such an early morning lifesaving!!!

      • At the start of the year, the allowance was:
        Specific – 20,000
        General – 2.5% x (380,000 – 28,000) = 8,800
        So total allowance was 28,800

        At the end of the year, receivables are 420,000 but we then write off the whole of Drab’s debt of 28,000 which leaves receivables as 392,000. (I am assuming that it was not written off during the year – if it had been then the receivables at the end of the year would be still 420,000. In the exam this will be made clear.)

        So…at the end of the year, the allowance required is simply the general allowance of 3% x 392,000 = 11,760

        The expense in the statement of profit or loss is therefore:

        Irrecoverable debt: 28,000
        Less: decrease in allowance (28,800 – 11,760) 17,040

        So final expense: 10,960

  15. Hello please explain that if i want credit my allowance for receivables for 9248 instead of credit 112560 and then debit 3312. The next step is debit an irrecoverable debt for 9248 as I have already increased the allowance account but then I have a different answer. You just only credit an irrecoverable debt for 3312. Regarding what you have done, if I want to debit 9248 then I have to credit 12560 so i’ll have the same answer with you but i don’t understand why?

    • There is more than one way of dealing with irrecoverable debts and allowances (all ending up with the same final result) but the way I show in the lecture is by far the best and the easiest.

      The point is that we need to end up with an allowance of 9248, but there is already an allowance of 11560 still sitting on the allowance account since last year.
      So…..to change it to the balance that we need, we simply debit or credit the allowance account to get what we want. In this example we need to debit with 3312 so that we then end up with a credit balance of 9248 as required.

      You can certainly debit the allowance account with 11560 to remove the existing balance (and credit the irrecoverable debts account) and then credit the allowance account with 9248 to create the required balance (and debit the irrecoverable debts expense account). This would end up with the same answer, but it is quicker and easier just to adjust for the difference.

  16. Please can you help explain how the net balance of 706,000 was derived as part of the answers to test question 4?

    i know tho get the receivables, the bad debt of 72,000 is deducted from the trade receivables of 838,000 ie 838000-72000=766,000. and the allowance for receivables is 60, 000. please correct me if im wrong.

    thanks

  17. Hi John. What exactly does this mean/imply (from Q1) “…adjust the allowance for receivables to the equivalent of 5 per cent of the trade receivables based on past events”…

    I don’t quite follow the logic behind this statement. Any clarification would be must appreciated.

    Cheers

    • It means that on average in the past, 5% of receivables ended up not paying. So they have decided to create an allowance of 5% this year to be safe – probably 5% of the receivables will not pay again (but they don’t know which people it will be).

      The % they decide on is just a matter of judgement – a combination of the type of business (some businesses have more people not paying than others) and also the economic climate (in times when the economy is bad, more people are likely not to pay). In the exam you will always be told the percentage.

      I assume that you have watched the lecture (because I do try and explain this during the lecture)?

      • Thank you for the explanation. I do understand the maths behind the answer, and i would have known how to solve the problem (were it worded differently). I just couldn’t quite understand what the statement implied, but now i do. Thank you.

        And yes i do watch the lectures religiously…though sometimes it’s the case that watching and comprehending are two different things…still trying to wrap my head around the whole Dr and Cr business…been told it becomes second nature the more you practice (fingers crossed).

  18. CAN ANYONE ANSWER THIS EXAMPLE PLEAZZZZ;;;

    The Income Statement Approach To Estimating Uncollectible Accounts Expense Is Used By Burgess Wholesales. On March 31 The Firm Had Accounts Receivable In The Amount Of 630,000$. The Allowance For Doubtful Accounts Had A Credit Balance Of 3,950$. The Controller Estimated That Uncollectible Account Expense Would Amount To One Half Of 1% Of The Net Sales Made During March. This Estimate Was Entered In The Accounts Byan Adjusting Entry On March 31.
    On April 12,An Account Receivable From Conrad Stern Of 3,110$ Was Determined To Be Worthless And Was Written Off. However, On April24 Stern Won Several Thousand Dollars On a T.V Game Show And Immediately Paid The 3,110$ Past Due Accounts
    PREPARE JOURNAL ENTRIES TO RECORD THE ABOVE.

  19. Could u explain Question3 for me?
    In the lecture Paul’s 2200 payment is debt as IRRECOVERABLE EXPENSE, while in Q3, Ken’s 1800, which is also been written off before, is simply “Add irrecoverable debt recovered 1800” by the answers. why Ken’s 1800 don’t need to be debt as IRRECOVERABLE EXPENSE ?

    Best Regards

    • In example 2 in the lecture, Paul was an irrecoverable debt – we credited receivables and debited irrecoverable debts expense.

      In example 3 in the lecture, and in test question 3, both Paul and Ken are irrecoverable debts recovered – they had been written off earlier but this year we received the cash.

      The correct entry would be to debit cash and credit irrecoverable debts expense (treating as a negative expense). However in both cases the bookkeeper has debited cash and (wrongly) credited receivables.
      So in both cases we need to debit receivables (because it should not have been credited there) and credit irrecoverable debts.

    • The explanation is actually in the comment below.

      There is an irrecoverable debt of 2040.
      Also, the allowance for receivables is reduced by 1900.80, and this reduction is effectively a negative expense.

      So the net expense is 2040 – 1900.80

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