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1. An increase in an allowance for receivables of 8000 has been treated as a reduction in the allowance in the financial statements. Which of the following explains the resulting effects?
Ans: Net profit overstaed by 16000, receivables overstated by 16000Could you pelase help me to explain the above question?
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Guess, the profit is 50,000.
As allowance increase,
dr. Bad debts. 8000
cr. Allowance 8000
now profit is 42000 as bad debt. expense reduce the profit…it should do.
But, it was recorded wrongly , like :
dr. Allowance 8000
cr. Bad debts. 8000
as the reduction in expense, profit has shown 8000 higher as 58000.if u do the correct accounting record then the profit would figure out like 42000, not 58000.thus profit is 16000 overstated 🙂
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