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In the year ended 30 September 20X8, Fauntleroy had sales of $7,000,000. The year?end
receivables amounted to 5% of annual sales. At the year end, Fauntleroy’s specific allowance
for receivables equated to 4% of receivables. He also identified that this amount was 20%
higher than at the previous year end.During the year irrecoverable debts amounting to $3,200 were written off and debts
amounting to $450 and previously written off were recovered.
What was the irrecoverable debt expense for the year?A $5,083
B $5,550
C $5,583
D $16,750THE ANSWER(A)
Year?end receivables 5% × $7,000,000 = $350,000
Year?end allowance for receivables 4% × $350,000 = $14,000
Allowance at start of year 100/120 × $14,000 = $11,667
Increase in allowance = $2,333*Irrecoverable debts expense account*
Write off of irrecoverable debts 3,200 dr
Increase in allowance 2,333 dr
Recovery of irrecoverable debts 450 cr
Statement of profit or loss (?) 5,083DOUBT
If we had made an allowance of 14000 and the irrecoverable debts was 3200 shouldnt that 3200 be subtracted from that allowance so it shouldnt have any effect on pnl right and irrecoverable debt expense account right? should the answer be 2333(increase in allowance)-450(bad debts recovered) =1833why is 1833 wrong?
You can subtract the irrecoverable debt from the allowance is you want (although it makes it messier).
If you do then the balance on the allowance account becomes 11667 – 3200 = 8,467.
Therefore the increase needed in the allowance becomes 14,000 – 8,467 = 5,533 and therefore the charge to the SOPL becomes 5,533 – 450 = 5,083.
I do suggest that you watch my free lectures on irrecoverable debts and allowances. The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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