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In this question, for a) ii), there is an insolvency of Cherry Co who is a major customer of Banana Co. He has run into insolvency as a result of which he cant pay 75% of our amount and for the remaining 25%, there is only a probability of the amount being recovered.
My question is, shouldn’t we write off the whole $300,000 of A/R as a charge to Profit and Loss account because the remaining 25% as stated by the question “may be able to be paid by Cherry Co”. Although, in the suggested answers, they have only written off only the 75% amount.A/R should only be shown in books if there is a 100% probability of the amount being recovered right?
If the remaining 25% “may” be recovered, then isn’t it a contingent asset? And contingent assets cant be recognized in financial statements.Help
“… there is only a probability of the amount being recovered”
The key word is “probability” and that means the chance of recoverability is greater than 50% (greater than the chance of non-recoverability) so a provision for doubtful debts (an allowance for receivables) will be made
But the debt itself will be written off only to the extent of 75%
OK?
Oh…so $225,000 is written off in full
and for the $75,000, we will create a provision for doubtful debts (lets say 5%).
so we will report in SOFP at (75,000-3,750) = $71,250
I think I understood nowYou don’t quite understand, not yet
Yes, we shall write off the full $225,000 but the entire amount of $75,000 is doubtful and so the provision required is $75,000
OK?
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