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FA Chapter 8 Questions Irrecoverable Debts and Allowances

VIVA

 

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  1. Hi,

    For Q1:

    -there appears to be a typo that can trip up people new to accounting like myself that don’t know what debt write off is.

    -when it says “write off debt totalling 88,800” does this imply that ALL debts were written off, totalling 88,800? Leaving 4,800 (from 93,600) as statistical approximation? If yes then that solves all my problems, if not then I’ll comment another question afterwards.

    Thanks

    • It means that debts of 88,800 were written off (removed) and the rest of the debts were left as OK. (The meaning of ‘write-off’ is explained in my free lectures on this). There is no statistical approximation of anything involved.

      This is the actual wording of a past examination question and is fine.

      • I’m confused why in the lectures you first remove irrecoverable and doubtful debts from receivables, before multiplying by the general allowance %, whereas in quiz question 1 you only remove the written off debt and leave the remaining old allowance for receivables.

        Lecture example 1:

        receivables 62,500 – irrecoverables (2500+1600) = 58,400

        58,400 – doubtful debt 2800 = 55,600

        55,600 x 4% = 2224

        So all problematic debts are subtracted from receivables before multiplying by general allowance.

        You did the same thing in lecture example 2:

        receivables 82,000 – irrecoverables (5000 + 3000) = 74,000

        74,000 – doubtful (8000 + 2000) = 64,000

        64,000 x 4% = 2560

        Again, all problematic debts removed before x % to find general allowance.

        Why isn’t it in quiz q1 here also:

        (1,240,800 – 93,600) x 5% to find general allowance

        instead of (1,240,800 – 88,800) x 5%?

        This leaves (93,600 – 88,800) 4800 problematic debt in the receivables when multiplying by 5%. Or is this not problematic debt?

        Thank you for your time.

      • The general allowance is calculated on the receivables (after removing any irrecoverable debts) less any specific allowance.

        In question 1 there is no mention of any specific allowance and therefore the general allowance is calculated on the receivables after writing off the irrecoverable debts.

      • Can we infer that after writing off 88,800, the remaining 4800 is the general allowance that was calculated for 2007? (That’s what I meant by statistical approximation earlier, I used the wrong words.) We can’t calculate the general allowance for 2008 until we remove all doubtful debts from receivables, and the question doesn’t say whether any of the remaining 4800 are doubtful debts. So the only way to calculate the general allowance for 2008 is to assume that 88,800 was all doubtful debt that is now deemed irrecoverable, and none of the remaining 4800 is actual debt, just general allowance for 2007. Thank you for your time.

      • No. In all cases we take the balance on receivables at the end of the year, after removing any irrecoverable debts. Then for the general allowance we take the relevant % of that balance (less any that we are told are specifically doubtful at the end of the year).

        How the allowance at the start of the year was calculated is of no relevance because everything will have changed during the year. We are only interested in the calculation at the end of the year (and then adjust whatever the existing balance was sitting there since the start of the year to get the balance we have calculated as being needed at the end of the year).

  2. Hello, John.
    Can you tell me in the fourth question 3 rd part(cash received from Ken) why we must debit receivables? You said in the lecture, when we receive irrecoverable debt from previous year, we debit cash and credit irrecoverable debt expenditure account? What did I miss?

  3. Hi John,

    in Q4 shouldn’t we subtract 2900 as that debt was only allowed for and remained in receivables account. So when cash was received there should be entries that close off that 2900 in irr. expense and allowance account, but also cash – debit and receivables – credit?

    • I agree only for the second entry Dr Cash – Cr Receivables. In the example 3 of the notes, for Ann (which is similar case) said ” Anna is included in the total cash receipts for the year”. This cash was credited to receivables. If Q4 had similar note, we shouldn’t credit receivables because receivables would already be credited.

  6. Hi. Regarding Question nr 4, the point nr (4). In the answer explanation it is written “(4) It is correct from cash received from doubtful debts to be credited to receivables.”, but in the calculation provided under the explanation, the cash received is not included. The calculation provided is “correct figure for receivables = 50000-2500+1800= 49300”, but the 2900 cash received from John (a doubtful debt) is not subtracted from the receivables.

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