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Apple has her own business selling dolls to stores. At 30 June 2013 she has a balance on her trade receivables of 62900.
A balance of $2000 due from X Co is considered irrecoverable and is to be written off. Y Co was in financial difficulty and Apple wishes to provide an allowance for 60% of their balance of $1600. She has also decided to make a general allowance for receivables of 10% of her remaining trade receivables.
What is the allowance for receivables in her Statement of financial position at 30 June 2013?
I forgot to copy the answer from the platform.
My answer was incorrect because I deducted only 60% of 1600 from Receivable c/f ( TR – Irrecoverable debt) balance to calculate general allowance for the year. Whereas, the answer on the platform was arrived at by fully deducting the 1600 specific allowance from Receivable c/f bal (TR – Irr debt) and then calculating the general allowance on the net balance.
I don’t understand why the entire 1600 was deducted, instead of the 60% of 1600, which is the actual allowance to be made.
They have obviously investigated the amount owing from Y and have decided that 60% of it is doubtful and have therefore decided to make a specific allowance of 60%.
That must mean that they think that the other 40% has no problem and that they are confident they will receive the other 40%. They are therefore not going to have a general allowance on the remaining 40%.
Also, the question refers to Y but then says that the general allowance is to be 10% of the remaining debts i.e. the other debts not including the debt of 1,600 owing from Y.
My answer:
Trade receivabels 62900
Irrecoverable debt 2000
TR bal c/f 60900
Specific allowance 960 (1600*60%)
NET 59940
General allowance 5994 (59940*10%)Closing allowance 6954 (960+5994)
The answer on the platform
Trade receivabels 62900
Irrecoverable debt 2000
TR bal c/f 60900
Specific allowance 1600 (1600*60%)
NET 59300
General allowance 5930 (59300*10%)Closing allowance 6954 (960+5994)
Why we deduct 1600 from 60900? Shouldn’t we only deduct the specific allowance of 960, not the entire 1600?
Could you please explain why entire 1600 is subtracted instead of only 960? cos we remove only the specific allowance from trade receivables before finding the general allowance on the remaining balance
The answer on the platform is correct and I don’t think that you have read my previous reply carefully.
The total receivables (after removing X) are $60,900.
This includes $1,600 owing from Y and so the remaining receivables are 60,900 – 1,600 = $59,300
The question says that there is to be a specific allowance for Y and you are happy with the $960.
It also specifically says that there is to be a general allowance of 10% of the remaining receivables and the remaining receivables are $59,300 as above.Because the remaining 640 (1600-960) we are confident that we would get from the customer, we deduct it to arrive at the net receivable on which the general allowance is to be calculated. Have I understood?
Please ignore my previous comment.
Reason 1: we deduct the remaining 40% from receivables before calculating the general allowance is because it is asked in the question that general allowances is to be calculated only on the debt receivables. It is implied in the question that the business must have investigated Y and concluded that only 60% is doubtful and the rest they are confident to receive. Hence, the remaining 40% will not be included as a debt in the calculation of general allowances.
My question, will we show the remaining 40% as debt on the face of the SOFP before deducting it against allowance?
Reason 2: the question has specifically asked that we are to calculate the general allowance of 10% on the remaining debt which subtly implies that the debt excluding from Y.
Have I understood?
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