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FA Chapter 8 Questions Irrecoverable Debts and Allowances

 

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  1. (If there was an allowance then the debt was doubtful, but it would still be left owing on receivables until it is paid.) sir this is for JOHN? coz john is doubtful but as there is no allowance made so we will leave it coz he still owes us money? is it the right concept i am making?

    • I assume that you are referring to question 4.

      John’s debt was doubtful and so the debt remained on receivables but an allowance was made. He has paid and so they will have credited receivables (and the allowance is no longer needed).

      Had you watched the free lectures before attempting the test?

  2. Sir in question 3 ? if the debts are written off we don’t take it in the calculation of new allowance? whereas if the debts are not written off we take them in the calculation of taking out the new allowance?

  3. Hello
    What is confusing me here is the cash figures in 3 and 4. I actually thought that the 1800 should be ignored in this particular case because when a debt is written off as a bad debt and is paid later, the accounts that should be affected are cash and irrecoverable debts account not the receivables account so personally I would actually add the 2900 instead of 1800. Thanka

    • The 1800 should not have appeared in the receivables account as you have written. However it was entered in the account in error and this needs correcting.

      As far as the 2900 is concerned. this debt had only been allowed for, and so it was correct for them to have entered it in the receivables account.

    • Correct – but where should the credit entry go? The entry so far affected has been to credit receivables and that is incorrect – it should be credited to the Allowance for Receivables Account

      So, to correct (as the printed solution clearly states) we need to Dr Receivables to correct the previous incorrect credit

      • Please sir when we debit receivables to correct the mistake , I thought you said we should credit the irrecoverable debt expense account . So how come are we crediting receivables again. That’s where I don’t understand

    • What’s related between Allowance for receivable in 2007 and Allowance for receivable in 2008. Why we need to find decrease in allowance? Can you show the T-Account of this transaction?

      • I explain all of this in my free lectures, and write up the t-accounts (even though, of course, you will not be asked to write up any t-accounts in the exam).

        Why are you attempting the test without having watched the lectures first?

    • Cash received has been included in the account when it should not have been. The entry should have been debit cash, credit irrecoverable debts expense. Instead they have debited cash and credited receivables.
      So to correct the mistake, debit receivables and credit irrecoverable debts expense.

  9. Hi sir,

    Revised receivables means our opening balance, right? As you said, we will credit receivables 2900 and debit cash 2900. So we will credit Receivable (2900 + 2500) and debit Receivables 1800. This is my caculation: 50000-1800+2900+2500 = 53600. I don’t know which is misunderstanding here. Please help me to clarify it.

    Thanks.

    • This is your reply:

      When cash is received from a doubtful debt we debt cash credit receivables, so entering it was correct. (If there was an allowance then the debt was doubtful, but it would still be left owing on receivables until it is paid.)

      Another question, is 50000 the closing balance? Hope it will not bother you

      Thanks,
      Trang.

      • $50,000 is the balance on the trial balance, and is therefore the balance at the end of the year before dealing the the irrecoverable and doubtful debts (and correcting the error that had been made during the year regarding the cash received from Ken).

        The question requires you to calculate the correct receivables balance that will appear on the SOFP.

        The irrecoverable debt (Mike) needs writing off, which reduces the balance. Doubtful debts do not affect the receivables balance (so 2 and 4 are irrelevant). The money from Ken should not have been entered on the receivables account because the debt had already been written off. It had been credited to the account but should not have been, so we need to correct it by increased the balance.

        Did you watch the free lectures before attempting this test?

  12. Hi,

    Apologies if this has already been covered but I cannot seem to get my head around this part of question 4!

    Included in the $50,000 receivables is $1800 cash received which had previously been written off. So when it was previously written off the double entry would have been CR Receivables DR Irrecoverable Debt. So when the cash is received, shouldn’t be double entry be CR Irrecoverable Debt DR Cash?

    Is the question saying that when the cash was received it was recorded like so – CR Irrecoverable Debt DR Receivable? Then that is incorrect, so we need to CR the 1800 out of Receivables – Why is it being DR on top of the 50,000 if it’s already included?

    Thank for your help!

    • Since it says that the receivables balance includes the 1800, it means that the entry the bookkeeper made must have been Dr Cash Cr Receivables. As you have written, the entry should have been Dr Cash Cr Irrecoverable debts. So to correct the mistake we need to Dr Receivables Cr Irrecoverable debts – this will increase the receivables balance.

      I know the wording is a bit confusing – saying it is included does not mean it is part of the total, simply that it is included (i.e. had been entered) in the account in arriving at the current balance. However I am afraid it was the wording in the real exam when this was asked.

    • if its an increase in allowance you add it in your total expenses as an increase in your allowance is an expense.
      if your allowance decreases you subract it in your total expenses as you have reduced your allowance for your receivables…i hope this helped i didnt really know how to explain it properly

    • Who said anything about crediting cash??

      When we receive cash from a debt that has been written off, we debit cash and credit the irrecoverable debts expense account.
      They should not therefore have credited receivables.

      I do suggest that you watch my free lectures on this – they are a complete course for Paper F3 and cover everything needed to be able to pass the exam well.

    • It was correct to record the cash received in the account.
      When there is a doubtful debt, an allowance is created but it remains in receivables.
      When the cash is received, we debit cash and credit receivables as usual.

      • You are saying we credit receivables but in answer receivables was not reduced for 2900.00.
        So we credit receivables and cancel allowance.

      • Receivables would have been reduced when the cash was received and therefore no further adjustment to receivables is needed.

        The question is not asking about what we do with the allowance (but what we do is dealt with in full in my free lectures).

        When a previously doubtful debt pays us, then we debit cash and credit receivables (and again, this will already have been done during the year when the cash was received).

  18. dear sir
    yesterday I ask a question but I cant see my comment here
    I ask about question number 4 that when we receive cash 2,900 and it was previously allowed. but we received it, cant we add it to our receivable?

      • I am not wrong – it is you who is obviously not understanding. This question was an actual past real exam question!!

        Of course we show receivables on the SOFP net of the allowance, but receivables and the allowance are recorded in two separate accounts.
        It might be an idea if you watched our free lecture on irrecoverable debts and allowances before you start making ridiculous comments.

  19. dear sir,

    thanks for best lectures

    please explain to me the bellow question.

    1- in question number one decrease in allowance is 93,600-57,600= 36000 but in answers it is mistakenly written 38,000.
    2- also in question number 4 can you please explain me that why we are considering 2500 as irrecoverable while it is included in receivable 50,000 and why we consider 1,800 received while it is written off. and why we are not considering 2,900 allowance while its received.

    • Thank you noticing the mistake in the workings for question 1 – I will have it corrected.
      Fortunately the final answer is correct 🙂

      For question 4, the 2,500 should not be included in receivables because Mike has gone into liquidation (which means he is bankrupt). It should therefore be regarded as irrecoverable and removed from receivables.
      The cash received from Ken should not have been entered into receivables – the entry should be debit cash, credit irrecoverable debts expense. Since it has been entered in receivables it must have been credited, but should not have been. So we need to debit receivables to remove the wrong entry.
      When cash is received from a doubtful debt we debt cash credit receivables, so entering it was correct. (If there was an allowance then the debt was doubtful, but it would still be left owing on receivables until it is paid.)

      • Never mind, figured it out on my own. There is an increase in the allowance, therefore I debit the allowance by the change in allowance and credit the expense account. Balance of expense account should be 0 and the difference transfers over to the income statement. Similar to one of the scenarios that we worked through in example 3 in the notes. I noticed that most of the questions revolve around increase and decrease of allowance, has that question been typically in the exams?

      • I am glad you figured it out. In fact you can deal with it in more than one way – all the matters is that the final expense and the final balance on the allowance are correct. The way I deal with it is the most sensible and the easiest way.

        Questions in the exam will almost certainly involve an increase or decrease in the allowance. However, in the exam you cannot possible be asked to prepare t-accounts – it will only be asked in Section A as a MCQ and therefore how you do your workings is not relevant (only the final answer is marked) 🙂

      • I really do not understand sir. When the question said “adjust the allowance for receivables to the equivalent of 5%”, does it mean that 93 600 must be reduced to 57 600? If that is the case, then shouldn’t the 57 600 (seeing as it is now the balance on the allowance for receivables account) be debited to the irrecoverable and doubtful expense account (88 800 + 57 600=146 400) and then credit the irrecoverable and doubtful debt expense account by (93 600 – 57 600=36000)? That would then leave a balance on the irrecoverable and doubtful debts expense account of (146 400 – 36 000=110 400)? I am trying to do it the T-accounts way because I understand better that way.

      • There is already a credit balance on the allowance account of 93,600 from last year. We need to reduce this to 57,600 and we therefore debit the allowance account with the difference of 36,000 and credit the irrecoverable debts expense account.

        For the irrecoverable debt, we debit the irrecoverable debts expense account with 88,800.

        This leave a balance on the irrecoverable debts expense account of 52,600 to be transferred to the SOPL.

        Did you watch the free lectures on this before attempting the test?

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