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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 $ 1333The 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.
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.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)
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