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Hallo,
I have these two examples, and am wondering if I am confused with terminology, or the answer of the second should be 5000:
Q1: When $2,500 of accounts receivable are determined to be uncollectible, which of the following should the company record to write off the accounts using the allowance method?
A: A debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable.Q2:On December 31, 2012, Andy Inc. has a debit balance of $1,500 for the Allowance for Uncollectible Accounts before any year-end adjustment. Andy Inc. also has the following information for its accounts receivable and the estimated percentages of bad debts for different past-due amounts:
0-30 $50,000 5%
31-60 $20,000 10%
61-90 $10,000 20%
What is the amount of bad debt expense to be reported on Andy Inc.’s financial statements for 2012?
A: 8000– shouldn’t the answer of Q2 be 5000 = 6500 – 1500
If Allowance for Uncollectible Accounts – is credited when an increase, and debited when a decrease, then in the 2nd example if we have a dr balance of 1500 we should subtract it, shouldn’t we?
Thank you!
Q1:
There is no such thing in F3 as an ‘Allowance for Uncollectible Account’.
To write of an irrecoverable debt, the entry is Dr Irrecoverable debts expense; Cr Receivables.Q2 – the same applies. That account does not exist in Paper F3.
I cannot keep answering questions that have no relevance to the ACCA exam.Hallo,
ok, let’s forget this example, because I can’t make a difference when I am solving an example about bad debts if it is related to F3 or not.
But, I think there is something I am misunderstanding about the theory here.
My Qs:
1. If we want to find the net Receivables, this is R’s – Allowance = Net R’s
e.g. 2000 – 100 = 1900 Net R’s and if next year we have a bad debt w-off of 70,do we subtract the 70 from 1900, and our allowance will be 30 now, so net R’s will be 1900 – 70 – 30 = 1800
2. I am totally confused with the following, is it possible to do it either way, why are there two ways:
– when bad debts are recovered we can:Dr Cash
Cr Irrec debtsor we can:
Dr Cash
Cr Receivables
– with this one, if we have recognized the bad debt already and since now it is being recovered, we could first Dr Receivables, Cr Irrec debts, and then we proceed with Dr Cash, Cr Receivables, is this ok?
– or if we have written off the bad debt already by use of an allowance a/c, then the entry before would be to reverse the writing off, Dr Receivables, Cr Allowance, and then we proceed with Dr Cash, Cr Receivables, is this ok?Why sometimes we use irrec. debts expense a/c, sometimes we use allowance, or maybe both is possible or only one of the two? Or is this material split between F3 and some exam later, and that’s why I can’t see the complete picture?
Thank you!
There is nothing extra in later exams – it is all in F3.
In practice there is more than one way of recording for irrecoverable and doubtful debts (obviously giving the same final answer).
However, in the exam, always we do the following:
Any irrecoverables:
Always DR Irrecoverable debts expense; CR Receivables
Any money received from a previous irrecoverable debt:
Always DR Cash CR Irrecoverable debts expense.
At the end of the year we calculate the allowance required. If there is already a balance there from last year, then we change it to the new balance, and the difference is entered to the irrecoverable debts expense account.
(I have looked again at your very first question for which you got an answer of 5000 but the correct answer was 8000. In fact the question itself was ridiculous because it said that there was a debit balance on the allowance account. That is impossible – the balance can only ever be a credit!! Had there been a credit balance of 1500, then your answer of 5000 would have been correct. Whoever wrote the question should be shot 🙂 )
Hallo,
Thx, now I am still thinking if something else, comes after these entries,
1. Is it correct that Receivables decrease, once by the amount of irrec debts, and second time by the amount of the allowance, or it’s not like that?
2. Once we Dr Cash, Cr Irrec debts, do we reflect this further in the Receivables a/c or not, i.e. do we Credit the Receivables, but if yes, where is the corresponding Debit? And do we credit the I/S by the amount of the recovery?
3. The balance of the allowance a/c also goes to I/S, but only as a loss, as far as you say. As, I was about to learn it, that it is possible to be either as a loss or a profit, although I read that the allowance is a SOFP account, why is it closed to the I/S? E.g. if we have an increase of the Allowance a/c on the Cr side, this should go as a Dr to the I/S, and if it a decrease in the allowance a/c, doesn’t this go as a credit to the I/S, or a decrease is not reflected to another account, or if reflected, then which is this other a/c that is credited?
4. Referring to 3. what is the meaning of decreasing the allowance a/c, we have bad debts recovered, or sth. else?
Thank you!
1. The balance on the receivables account is not affected by the allowance. On the SOFP however we show receivables less the allowance.
2. No – there is no reason whatsoever to show it in the receivables account.
No – we don’t show it in the SOPOL because it is already there effectively since it has reduced the expense in the Irrecoverable debts expense account.3 No – the balance on the allowance does not go to the SOPOL. The change in the allowance is in the Irrecoverable debts expense account and that appears in the SOPOL.
4 There is no ‘meaning’. At the end of the year the allowance needed depends on the receivables at the end of the year.
Hallo,
ok, I went back to read the theory in OT notes.
I would like to ask sth, also referring to 4. above.
If we have a decrease in the allowance a/c, this decreases the irrec debts a/c, this means we will have less expense in the SOPOL. But If our expense has decreased, this wouldn’t mean we have received money from a debt previously written off, it would only mean that the chance of getting back money has increased, and that’s why our expense has decreased, not that we have received real cash back, but we only reflect the possibility of this happening in the SOPOL, is this correct, or wrong?
Thank you!
If we increase the allowance then it is an expense which reduces our profit. If we reduce the allowance then it is a saving, which therefore reduces the expense and increases the profit.
Hi sir,
Can you answer this question i don’t know how to get the correct answer $6890?Question: Apple has her own business selling dolls to stores. At 30 June 2013 she has a balance on her trade receivables of $62,900.
A balance of $2000 due from X Co is considered irrecoverable and is to be written off. Y Co was in financial difficulty and Apple wishes to provide an allowance for 60% of their balance of $1600. She has also decided to make a general allowance for receivables of 10% of her remaining trade receivables.
What is the allowance for receivables in her statement of financial position at 30 June 2013?Specific allowance: 60% x 1600 = 960
General allowance: 10% x (62900 – 2000 – 1600) = 5930
Total allowance = 960 + 5930 = 6890
Thanks for your calculation John, but i still confused from trade receivable we just need to deduct bad debt and allowance right? In this question allowance amount just need to deduct $960 isn’t? why deduct $1600?
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