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In 2014 specimen exam question number 17.
At 30 june 2005 allowance for receivables was $39000. At 30 june 2006 trade receivables totalled $517000. It was decided to write off debt totalling $37000 and to adjust the allowance for receivables to the equivalent of %5 of trade receivables based on past events.What figure should appear in the statement of profit or loss for the year ended 30 june 2006 for receivables expense?
My answer would be:
517000- 37000 = 480000
480000 * 0.05 = 24000
24000- 39000 = – 15000However the write answer was 22000
I dont understand how
You need to add also the cost of writing off the irrecoverable debt of 37000.
37000 – 15000 = 22000
Thank you for the reply.
Isn’t 37000 bad debt and should have a separate heading in the profit and loss statement and not be included with the allowance for receivables?
It’s quite weird that the previous allowance included both bad debts and provision for doubtful debts.
After looking at some of the answers here:
24,000 + 37,000 – 39,000 = 22,000
IMO previous allowance shouldn’t have included bad debts. Bad debts if recovered (which is highly unlikely) should go into the bad debt recovery account.
Please correct me someone if I am incorrect.
The allowance itself does not include irrecoverable debts.
However the question wanted the expense in the Statement of profit or loss.
The expense is always the cost of any irrecoverable together with the change in the allowance..
Here, the irrecoverable was 37000 and the decrease in the allowance was 15000, giving a net expense of 22000.
Ignore what Deelo has written – it makes no sense at all!
(And Deelo should not have answered on this forum anyway – he or she is not the tutor 🙂 )Thanks John got clarifying, for a moment I was confused.
But my qns is why is provision for doubtful debt and bad debts aggregated in the P/L?
Shouldn’t the 37000 be an expense for bad debts and the 15000 as a negative expense (or adding back to P/L) due to lower provision for doubtful debts, be separate entity in the P/L??
Ok so the question is asking for both expenses and not only doubtful debt. It is clear now.
Thank you johnIn the exam, if the expense/charge in the Statement of profit or loss is required, then they will always want the net expense – i.e. the total of irrecoverable debts, change in allowance, and any irrecoverable debt recovered.
(This is because there are several ways of dealing with the double entries for irecoverable and doubtful debts and although they all result in the same net expense, the ‘split’ between irrecoverable and change in allowance can be different.)
In practice, certainly some businesses may split the expense, but there is no requirement to and, again, in the exam just show one net total.
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