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XY Co has a balance of receivables of $250,000. It wishes to provide a specific allowance of 60% on a debt of $20,000. It also wishes to set up a general allowance of 2% of receivables. What is the charge to the income statement?
Specific allowance
60% × $20,000 = $12,000
General allowance
$
Total receivables 250,000
Specific provision (20,000)*
Balance 230,000
General allowance = 2% × $230,000 = $4,600
Total allowance charged in income statement = $12,000 + $4,600
= $16,600Hi sir. I don’t understand why we remove 2000 against 250000, not 12000?
This is a little trick to watch out for.
You are happy (I think) that for the debt of $20,000 we need a specific allowance of $12,000.
The general allowance is 2% (in this case) of all other debts. If we simply took out 12000 and then calculated 2% on the balance we would end up with more that 60% allowance for the problem debt. The 2% is always based on the receivables (after removing irrecoverables) less those debts where there has been a specific allowance made – whether the specific allowance was for all of the ‘problem’ debt (as is usually the case) or whether it was only for part of the ‘problem’ debt (as in this case).
I hope that is clear 🙂
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