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Hello sir,
I have come across one small doubt.
Question: The sales revenue of J co was $2 million and its receivables were 5% of sales. J co wishes to have a specific allowance one-third higher than in the current allowance.
How the profit for the period be affected by the change in allowance?
Answer is profit be reduced by 1000
However, i think that increase in allowance is calculated as 1/3 * 4000. So that would make profit be reduced by 1333.You have not copied out the whole question!
The receivables at the end of the year are 5% x $2M = $100,000.
Assuming that they want an allowance of 4% (which I am guessing it what is in the question) then they want the allowance at the end of the year to be $4,000.
For this to be 1/3 more than the current allowance (i.e. the allowance at the start of the year) then the current allowance must have been $3,000. (1/3 x $3,000 = 1,000)
So the profit is indeed reduced by $1,000.
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