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Apple has her own business selling dolls to stores. At 30 June 2013, she has a balance on her trade receivables of 62900. A balance of $2000 due from X co is considered irrecoverable and is to be written off. Y co was in financial difficulty and Apple wishes to provide an for allowance for 60% of their balance of $1600. She has also decided to make a general allowance for receivables of 10% of her remaining trade receivables. What is the allowance for receivables in her financial position at 30 june 2013?
In the above question, when we calculate general allowance, why do we subtract specific allowance of $1600 instead of specific allowance of $960
Your answer:
The fact that they consider 60% of Y’s balance to be a problem means that they consider the remaining 40% to be OK. They will not therefore make an allowance for the remaining 40% of Y’s balance because that would effectively mean that they were regarding 70% of the total to be a problemThe general allowance will only ever be calculated on those debts for which they are not making a specific allowance.
My question:
Thank you for helping me with the question. I have to ask you another question regarding it since I am not quite clear with the answer. So, May I?The general allowance will only ever be calculated on those debts for which they are not making a specific allowance. In this question, the specific allowance is $960, isn’t?
So, the general allowance should be (my understanding):
10% * (62900-2000-960).
But, the answer is : 10% (62900-2000-1600). Please help me to figure out the reason?$1600 debt has been examined and the specific allowance is to be 60% which is $960.
The total debts (after writing off X) are $60,900. This includes the $1,600 from Y and so the remaining receivables (i.e. everyone except Y) are 60,900 – 1,600 = 59,300.
The question says that the general allowance is to be 10% of the remaining remaining, and so the general allowance is 10% x 59,300 = 5,930.
Y co was in financial difficulty and Apple wishes to provide an for allowance for 60% of their balance of $1600.
My understanding for above part:
If the allowance is 60% of the debt, that effectively means the remaining 40% is considered irrecoverable debt. Is that correct?No, your understanding is not correct.
Y is in difficulty and they wish to provide for 60%. As I wrote before that must mean that they think that they will receive the remaining 40%.
It seems finally I’ve got it. We only make general allowance for debts that don’t have specific allowance. In this case, though we made 60% of specific allowance, it means we have made the specific allowance. Since the remaining 40% is considered to be recoverable, we don’t want to include that 40% when calculating general allowance. So, we subtract total of $1600 and calculate general allowance like this: 10%* (62900-2000-1600)
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