The following extracts are taken from the trail balance of charlie's business at 31 December 20x7
Receivables $36 800
Allowance for receivables $1 460
On checking the accounts it was found that an irrecoverable Receivables of $ 570 had not been written off and $240 had been recovered from a previously written off which had not yet been entered in the books.Charlie wishes to carry forward and allowance of 6% of receivables.
What is the total charge or credit to the statement of profit or loss for irrecoverable receivables and allowance of receivables?
A.Charge of $1,354
B.Charge of $1,044
C.Charge of $ 804
D.Charge of $ 384
Please show all the calculations!
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Allowance for receivables
9y ago#1Receivables less irrecoverable amount = 36,800 - 570 = 36,230
Allowance is to be 6% of this = 2173.80
Increase in allowance = 2173.80 - 1460 = 713.80 (expense)
Amount written off = 570 (expense)
Amount recovered = 240 (income)
Net charge = 713.80 + 570 - 240 = 1043.80, so answer B.
B. Charge of $1,044
Receivables at year end = $36,800
Now, this includes a bad debt of $570, which must be written off.
So,
Receivables = $36,000 - $570 = $36,230
Now, this is the actual amount of receivables on which an allowance of 6% is to be provided.
Allowance for Receivables = $35,430*6% = $2,174
Less: Opening Allowance for Receivables = ($1,460)
Allowance for Receivables = $714
The charge to Income Statement will be the ending balance of Bad Debts Account. So far the entries in Bad Debts Account are:
Dr Bad Debts $570
Dr Allowance $714
Cr Bad Debts Recovered $240
Therefore, the ending balance is $1,044 ($570+$714-$240).
Thank you
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