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Good day sir 🙂 I need help with a question.
At 30 June 20X5 a company’s allowance for receivables was $39,000. At 30 June 20X6 trade receivables totalled $517,000. It was decided to write off debts totalling $37,000 and to adjust the allowance for receivables to the equivalent of 5% of the trade receivables based on past events.
What figure should appear in the statement of profit or loss for the year ended 30 June 20X6 for receivables expense?A $61,000
B $52,000
C $22,000
D $37,000The answer is $22,000. My question is why was the opening allowance ($39000) deducted from the movement in allowance ($24000) and then subtracted from the irrecoverable debts ($37000)?
Thank you in advance Sir Moffat 🙂 God bless.
The expense for the year is always the cost of any irrecoverable debts, plus/minus the change in the allowance, less any irrecoverable debts recovered.
In this question the new allowance will be 5% x (517,000 – 37,000) = 24,000.
Therefore the allowance needs reducing by 39,000 – 24,000 = 15,000. Since this is a reduction in the allowance it is a ‘negative’ expense.So the total expense is 37,000 – 15,000 = 22,000.
It will help you to watch my free lectures on this. Our lectures are a complete course for Paper F3 and cover everything needed to be able to pass the exam well.
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