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Question:
“Panther owns her own business selling Gladiator dolls to department stores. At 30 June 20X2 she had the following balances in her books:Trade receivables $31,450
Allowance for receivables (General) (as at 1 July 20X1) $(450)A balance of $1,000 due from Selfrodges Co is considered irrecoverable and is to be written off. Horrids Co was in financial difficulty and Panther wished to allow for 60% of their balance of $800. She also decided to make a general allowance of 10% on her remaining trade receivables. What was the allowance for receivables in her statement of financial position at 30 June 20X2?”
Answers of the book:
“General allowance =10%*((Trade receivables – irrevocable debts) – Horrids) = 10%*((31.45 – 1) – 0.8) = 2.965
Specific allowance = 0.8 * 60% = 0.48
Total allowance = 3.445”I don’t know why they could calculate the “general allowance” by the formular above, and this is my answer:
“General allowance = 10%*((Trade receivables – irrevocable debts) – specific allowance of Horrids) = 10%*((31.45 – 1) – 0.8 * 60%) = 2.997
Specific allowance = 0.8 * 60% = 0.48
Total allowance = 3.477”Please tell me why BPP Revision kit used this method to find out the answer, thank you so much.
If they are allowing for 60% of Horrid’s debt, then presumably they think that the other 40% is no problem, therefore they will not want 10% of that as well – it would be allowing for it twice 🙂
(By the way, the word is ‘irrecoverable’ not ‘irrevocable’ 🙂 )
Irrecoverable Debts
May you please clarify for me why answer to Test question # 2 is $139.2 instead of $98.40
at 31 Dec 2005 the ledger of X Co. included a $5.376 allowance for receivables. During the year ended 31 Dec 2006 irrecoverable debts of $2040 were written off . Receivables balance at 31 Dec 2006 totaled $173760 and the company wished to carry forward a general allowance of 2%.
The total charge for irrecoverable debts and change in allowance for receivables in the 2006 statement of Profit or Loss isA $98.4
B $139.2
C $3.904.8
D $5.515.2For your question,
Total charge to P&L = 2040 + (173760 * 0.02 – 5376) = $139.2Because:
Allowance for receivable for the year X6 = 173760 * 0.02
The receivables balance at 31 Dec 2006 is “Net receivables after deducting irrecoverable debts occurred during the fiscal year”harry1094 is correct (but please don’t answer questions in this forum because it is Ask the Tutor (although do help people in the other forum 🙂 )
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