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The sales revenue of J Co was $2 million and its receivables were 5% of sales. J Co wishes to
have a specific allowance for receivables of $4,000, which would make the allowance one?
third, higher than the current allowance.How will the profit for the period be affected by the change in allowance?
A Profit will be reduced by $1,000
B Profit will be increased by $1,000
C Profit will be reduced by $1,333
D Profit will be increased by $1,333The answer, is A, but how to calculate it ? I calculate it by 1/3 but i get the answer C
can you show us the calculation pleaseThe allowance required is 1/3 more than it was before.
So if it was X before then it will need to be X + 1/3X now. X + 1/3X = 4/3X
If 4/3X = 4,000, then X = 3/4 x 4,000 = 3,000.
So….it was 3,000 before and they need to increase it by 1,000 so as it to become 4,000 now.
And increasing the allowance by 1,000 will reduce the profit by 1,000.
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