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January 20X1, selling health foods to customers, most of whom make use of a credit facility that Corin offers. (Customers are allowed to purchase up to $200 of goods on credit but must repay a certain proportion of their outstanding debt every month.)
This credit system gives rise to a large number of irrecoverable debts, and Corin Flake’s results for his first three years of operations are as follows.Year to 31 December 20X1
Gross profit…………………………………………………………$27,000
Irrecoverable debts written off………………………………$8,000
Debts owed by customers as
at 31 December 20X1…………………………………………$40,000
Allowance for receivables……………………………………2½% of outstanding receivables
Other expenses ………………………………………………….. $20,000Hi sir. Sir, in this case, do we write $7000 ( $8000- $40000*2.5% in T account) in income statement?
You workings are correct but the total is wrong!
8000 + 40,000×2.5% is equal to 9,000 🙂(This is assuming that there was no allowance at the end of last year – I assume that the question said that they only started business in January, in which case there would have been no allowance last year.)
If you have typed the question correctly, then it is a rather stupid question – it says that the results for the first three years are as follows, and then only gives information for one year !!!
(Incidentally, the exam cannot ask you to write up a t-account. The question would be required either the expense in the Statement of profit or loss (which is 9,000) or alternatively the amount of the allowance in the Statement of financial position (in this case $1,000)
I just wrote one part of question. I use T account for myself for understanding and solving question.
That’s OK (provided it does not take you too much of your time in the exam).
I assume that you are happy with the answer anyway 🙂
Could you please explain why we do not calculate the allowance for receivables as :($40’000 – $8’000) * 2.5% (after deducting the irrecoverable debt)
Thank you.
Tyra: the debts were written off during the year, and so they are already missing from the balance at then end of the year.
Avishay: Read my earlier reply properly!
If the question does not say there was an opening allowance then presumably there was not an opening allowance – we cannot simply invent one!!! As I wrote, the question probably said that they started business on 1 January in which case there will obviously have been no opening allowance.
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