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BBP book F3. Page 223. Question 2
Irrecoverable debts are $5,000. Trade receivables at the year end at $120,000. If an allowance for receivables equivalent to 5% of trade receivables is required, what is the entry for irrecoverable debts and allowances for receivables in the statement of profit or loss?
a) $5,000
b) $11,000
c) $6,000
d) $10,750
My workings:
Subtract irrecoverable debts from the trade receivables balance (the question does not say the irrecoverable debts are already written off the trade receivables balance)
120,000-5,000= 115,000$
Calculate the allowance = 115,000*5%=$5,750
Entry for irrecoverable debts and allowances for receivables in the statement of profit or loss:
$5,000+5,750=$10,750! Answer d)
However, according to the book the answer is b. Why is it assumed than the irrecoverable debts are already written off and should not be subtracted from the trade receivables balance before applying the percentage for allowances?Receivables equal to 120000 at the year end.It means that they’ve substracted irrecoverable debt from it.(Before receivables were 125000)
gika21: Although what you have written is correct, please do not answer in this forum because it is the Ask the Tutor Forum. (But please do help people in the other F3 forum 🙂 )
Francisco: gika21 is correct, although the wording of exam questions makes it clear whether irrecoverable debts have already been removed during the year, or are to be removed at the end of the year. I assume this question is in the Study Text – I do not have the Study Text, only the Revision Kit, and so I cannot check the wording myself.
If you are watching my lectures then you do not really need the Study Text – the lectures are a complete free course for Paper FA (F3) and cover everything needed to be able to pass the exam well. What is essential is that you have a Revision Kit, because that contains lots of exam standard questions for practice, and practice is vital to passing the exam.
Thanks John, indeed is the BPP F3 study text that I use sometimes when I want/need to complement the free lectures notes or I feel I need to know more about a specific topic.
The question posted here is actually copy/paste as it appears on the book but if as you mentioned, the working of exam questions makes it clear whether irrecoverable debts have already been removed during the year, or are to be removed at the end of the year, I should not worry to much about it.
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