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At 30 June 20X5 a company’s allowance for receivables was $ 39,000. At 30 June 20X6 trade receivables totaled $ 517,000. It was decided to write off debts totaling $ 37,000 and to adjust the allowance for receivables to the equivalent of 5% of the trade receivables based on past events.
What figure should appear in the statement of Profit or Loss for the year ended 30 June 20X6 for these items?Shafiq, I will answer the question, but in future please do not just type out an exam type question as though you are setting me a test! I am not taking an exam (because I have already passed it!!!). Tell me what problem you are having with it and then I will explain 🙂
I assume that you have watched my free lecture on Irrecoverable debts, and that you will therefore know that the expense in the Statement of profit or loss is always:
Cost of writing off irrecoverable debts + cost of increasing the allowance (or – saving by reducing allowance) – any previously irrecoverable debts recovered.
In this question, the irrecoverable debts are $37,000. There are no irrecoverable debts recovered. The allowance required at the end of the year is 5% of the receivables. After writing off the irrecoverables, the receivables are 517000 – 37000 = 480,000. So the allowance required is 5% x 480,000 = 24,000. The allowance left from last year is 39,000 and so we need to reduce it by the difference of 15,000.
So the total expense is 37,000 – 15,000 = 22,000.
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