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i came across this question in the ACCA revision kit and CBE mock exam… ‘At 30 June 20X4 a company’s allowance for receivables was $39,000. At 30 June 20X5 trade receivables totalled $517,000. It was decided to write off debts totalling $37,000. The allowance for receivables was to be adjusted to the equivalent of 5 per cent of the trade receivables. What figure should appear in the statement of profit or loss for these items?’
i calculated and got $15 000 and even did the T-accounts and i still got $15 000 yet the revision kit says we subtract the $15 000 from the bad debts written off of $37 000 and the figure which should appear in the statement of profit or loss is $22 000.
My question is why do we subtract the Provision for the year of $15 000 from the bad debts written off of $37 000?The expense in the SOPL is always the cost of any irrecoverable debts written off, together with the change in the allowance.
Here, the new allowance is 5% x (517,000 – 37,000) = 24,000.
Therefore the allowance is reduced by 39,000 – 24,000 = 15,000, and because this is a reduction it is a ‘negative’ expense (a saving).The irrecoverable debts is an expense of 37,000
Therefore the nest expense for the year is 37,000 – 15,000 = 22,000.
I do suggest that you watch my free lectures on this. The lectures are a complete free course for Paper F3 and cover everything needed to be able to pass the exam well.
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