Allowances for Recievables — OpenTuition Forums

AAfrina10y ago

Hi Mr. Moffat, Hope ur fine. I need ur help again in explaining me a portion of the following question. The sales revenue in a company was $ 2 million & its receivables were 5% of sales. The company wishes to have an allowance for receivables of 4% of receivables, which would make the allowance 1/3 higher than the current allowance. How will the profit for the period be affected by the change in allowance? A. Profit will be reduced by $ 1000 B. Profit will be increased by $ 1000 C. Profit will be reduced by $ 1333 D. Profit will be increased by $ 1333 The answer in the exam kit gives option A as the right answer. In order to find out the movement of allowance, I calculated as the required allowance and resulted in the answer $ 4000 { 4% of $ 100,000 [ receivable 5% of sales] }. However on the answer the current allowance is $ 4000 x 3/4. I wish to know how do i calculate to reach this figure of 3/4. I'd be rly grateful if u helped.

Rrkwasim10y ago#1

Hey Afrina, As I could understand the question, required receiveable allowance is higher by 1 % out of 3 %. In other words let assume current receivables allowance is 100% and required allowance is 133.33%. So current allowance would be $3000 and required allowance would be 4000. This is my way to solve. Anyway John would give you proper answer.

John MoffatTutor10y ago#2

Suppose the current allowance is X%. Then since the new allowance is 1/3 higher, it means the new allowance is X + 1/3X. This equals 4/3X (or if you find it easier, it equals 1.3333 X). This must equal 4,000. So 4/3X = 4,000. Therefore X = 3/4 X 4,000 ( = 3,000) (or again, if you prefer, 1.3333X = 4,000. Therefore X = 4,000/1.333 = 3,000)

AAfrina10y ago#3

Thx Mr. Moffat & rkwasim.

John MoffatTutor10y ago#4

You are welcome :-)