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20. Apple owns her own business selling dolls to stores. At 30 June 2008 she had the following balances in her books:
Trade receivables: 62,900
Allowance for receivables: (900)
A balance of $2,000 due from X Co is considered irrecoverable and is to be written off. Y Co was in financial difficulty and Apple wished to provide an allowance for 60% of their balance of $1,600. She also decided to make a general allowance for receivables of 10% of her remaining trade receivables.
What was the allowance for receivables in her Statement of Financial Position at 30 June 2008?Thanks for your help 🙂
I found this answer in the forum:
No need to incorporate 900 at the beginning because in order to calculate allowance for receivables you start with your gross unprovided receivables. The confusion is maybe coming from Y Co – its receivable is 1,600 and the company provided 60% for this receivable – since the specific provision is made (1,600×0.6=960), there is no need to do a general provision as well (on the remaining amount (1,600-960=640) . So in order to calculate allowance for receivables in the statement of financial position you should start with your gross unprovided receivables (62,900) – receivable written off (2,000) – receivables for which specific provision was made – (1,600) and on this amount you calculate general provision. Total provision will be equal to specific provision + general provision.
The question is not asking about the movement in the allowance, but if it did then you would start with what is already in the books (900) and would compare it to what the company should have (6,890) – difference should be charged to the income statement.Trade receivables 62,900
Less irrecoverable debt (2,000)
Less balance for which specific allowance required (1,600)
=> receivables balance for which general allowance required = 59,30010% x 59,300 = 5,930 general allowance
Balance for which specific allowance required = 1,600
60% x 1,600 = 960 specific allowance=> total allowance for receivables for inclusion on SOFP = 960 + 5,930 = 6,890.
See also questions 600 and 641 at https://www.tenjin.ie/projects.aspx.
Tenjinsmith
Wouldn’t you only make an allowance for the 60% of the 1600 at the beginning?
Meaning the receivables balance to calculate the general allowance on would be:
62900
-2000 (IRR Debt)
-96059940 * 10% =5994
adding back the specific allowance – 5994+960 = 6954 CR on her Allowance for receivables
Surely we would not provide for the other 40% in the specific allowance at the beginning, why would we include the 40% that we are not making an allowance for?
@James
I support tenjismith in his calculations.
You calculate specific allowance and then calculate general. When you calculate specific – you adjust it to SPECIFIC thoughts. So Apple wants it to be 60%, not 10%.
When you calculate general you don’t need to adjust specific allowance again, as it is specific.<cite> @jawong said:</cite>
TenjinsmithWouldn’t you only make an allowance for the 60% of the 1600 at the beginning?
No – the purpose of the first part of the calculation is to calculate how much of the total receivables balance needs to be included in the general allowance calculation.
When you are calculating an allowance for receivables, a trade receivable balance is reviewed for inclusion in the allowance either specifically or generally but not both.
So, the 1,600 is reviewed as a specific allowance only, therefore excluded from the general allowance calculation.
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