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Dear Mr John,
I am stuck in this question:
“At 30 June 2013, a company’s allowance for receivables was $39,000. At 30 June 2014, trade receivables totalled $517,000. It was decided to write off debts totalling $37,000 and to adjust the allowance for receivable to the equivalent of 5% of the trade receivables, based on past events.
What figure should appear in the income statement for these items?”Was the correct answer $22,000 or $23,850?
I didn’t know what the phrase “based on past events” really mean. The adjusted allowance should be calculated based on the new balance of receivables (after write off $37,000 of bad debt), right?
I made the following equation:
Bad debt expense = 5%($517,000-$37,000) – ($39,000-$37,000) = $22,000.
Can you give me the correct answer, please?Thank you!
$22,000 is the correct figure for the Irrecoverable and doubtful debts expense in the Statement of profit or loss.
‘Past events’ simply relates to the 5%. Although in the exam you will always be told what % to use, in practice it is up to the business to decide. If they have never had irrecoverable debts in the past they might decide on 0%, if they have had lots of irrecoverable debts in the past then they might decide on 10%. There is no rule. This business has decided to use 5% based on the past.
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