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Opentuition course note p. 54
At 31 December 2005, the ledger of X Co. included a $5376 allowance for receivables. During the year ended 31 December 2006 irrecoverable debts of $2040 were written off. Receivables balances at 31 December 2006 totalled $173760 and the company wished to carry forward a general allowance of 2%.
The charge for irrecoverable debts and change in allowance for receivable in the 2006 statement of Profit or Loss is
To calculate the allowance for receivable, why is not (173760-2040)*2%?
They are asking for the charge to the statement and profit or loss. I think you may have confused it with the statement of financial position.
Zoro: Please do not answer in this forum. It is Ask the Tutor and you are not the tutor. Answer in the general F3 forum.
(and you did not answer Koey’s problem! Koey knows what the question is asking for, but is asking for the calculation of the allowance, which of course is needed as part of the workings.)Koey:
It is because the irrecoverable debts were written off during the year. So the balance at the end of the year is already after removing those debts.
(If they were written off at the end of the year after taking the balance, then what you have written would be correct)please solve and explain!!
For the year ended 31st December 2005 a company’s receivables balance was $150,000. They had a general allowance of 5%. At the year ended 31st December 2006 the company’s receivables are $135,000 – the company would like to maintain a 5% general allowance.
Required
What is the impact on the statement of comprehensive income and how will the receivables be presented in the statement of financial position?You should watch the free lecture on irrecoverable and doubtful debts!
The allowance at the end of the year is 5% of receivables.
On the SOFP we show the receivables less the allowance, as a current asset.
Because the allowance this year is lower than last year, the difference will increase the profit for the year.
Again, you should watch the lecture – I cannot type out the whole lecture here!!
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Dear sir John Moffat,
First of all I would like to thank you for the work which you are doing. I have a question which is making me confused. The question is, What will happen, if the debtors for the year (in which i have booked allowance, that effected p&l) paid subsequently i.e no one is actually become bad debts.Now as all the customers have paid full amount of receivables but our profit for that year in which I have booked the allowance is less than the profit which would be shown.
The figure in the SOPOL is the difference between the allowance required at the end of the year and the allowance at the start of the year.
If the allowance increases then the difference is an expense and reduces the profit.
However, if the allowance reduces (which may happen if all the previously doubtful ones have paid) then there is a ‘negative’ expense, which increases the profit.
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that means the change in allowance effects to the upcoming year profit
The change in the allowance over the current year affects the current years profit.
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I mean sir, the profit of last year which decreased because of allowance in that year. Now subsequently in the current year the all receivables have paid their amount, which results decrease in the allowance in current year.(i.e increase in the profit of current year).
The last year profit decreased as a result of allowance and current year profit increased as a result of all receivables have paid their amount.
If i am wrong correct me sir.
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Thank you sir, now i have no confusion in this topic.
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