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Hi, I have doubt for the question below:-
In the year ended 30 sep 20×8, Fauntleroy had sales of $7,000,000. The year-end receivables amounted to 5% of annual sales. At the year end, Fauntleroy’s specific allowance for receivables equated to 4% of receivables. He also identified that this amount was 20% higher than at the previous year end.
During the year irrecoverable debts amounting to $3,200 were written off and debts amounting to $450 and previously written off were recovered.
What was the irrecoverable debt expense for the year?
My answer is B) $5,550
But the answer shown is A) 5,083.I found that the root of difference is at the point of calculating the previous year allowance for receivable. I use this year allowance receivable 4k – (4k x 20%) = 11.2k. While the answer calculating is 4k x 120%/100% = 11.667k.
I would appreciate if you could help to solve my doubt. Thank you.
For every $100 allowance at the end of last year, the allowance this year is 20% higher and so is $120 at the end of this year.
So putting it the other way round, for every $120 allowance at the end of this year, it must have been $100 at the end of last year.
The allowance at the end of this year is 4% x 5% x 7,000,000 = $14,000
So the allowance at the end of last year was 100/120 x 14,000 = $11,667.
So the increase is $2,333 (or 20/120 x $14,000).
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