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At 30 April 2005, ABC Ltd has a receivables balance of $60,000 and an allowance for receivables of $900. Following a review of receivables, he wishes to write off an irrecoverable debt of $5,000 and adjust his allowance to 5% of receivables.
Recovery from Good and previously written off is 5,000 and 2,000 respectively. What will be the adjusted balance of the allowance for
receivables?After writing off the debt the total receivables will be 60,000-5,000 = 55,000.
After recovery from Good (I assume this means Good pays ABC 5,000), receivables will amount to 50,000.
The recovery of the previously written off debt will not affect receivables: that amount was no longer there.
5% of 50,000 = 2,500 and that is the required allowance for receivables.
Following a mid-year review of its aged receivables’ listing, Pluto Co identified three irrecoverable debts totalling $630 which should be written off. One of the debts, for $150, was already included in the allowance for receivables.
What accounting entries should Pluto Co make to write off the irrecoverable debts?
The answer is :
Debit Irrecoverable debts $630
Credit Trade receivables $630My answer :
Debit Irrecoverable debts $480
Debit Allowance for receivable $150
Credit Trade receivable $630My question is why we didn’t reverse the allowance for receivable ( Dr Allowance for receivable, Credit IRD). I thought if an IRD is already included in the allowance for receivable, we need to reverse/reduce the initial allowance recorded, then recognise the IRD. So the net equation will be Debit Allowance for receivable, Credit Trade receivable.
The problem is that the process is not complete. After writing off the irrecoverable debts, either your way or the answer’s way at some point a new allowance for receivables has to be established. If the firm wanted the balance on that account to be, say, $1000, your method would require a larger journal to bring the balance up to $1,000 with the Dr going to the irrecoverable debts expense.
So, the total amount posted to that account will end up being the same whichever method is used.
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