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In the year ended 30 September 2008, Alexis had sales of $ 7,000,000. Year end receivables at 4% of receivables and as a results discovers that the allowance is 20% higher than at the previous year end.
During the year irrecoverable debts amounting to $ 3200 were written off and debts amounting to $ 450 and previously written off were recovered.
What is the irrecoverable debt expense for the year?
Can you explain the workings step by step sir?
You have not typed the whole question. I think you meant to type that the year end allowance is 4% of receivables, but you have not given any information about the receivables themselves.
Please check, and if you type the missing bit of the question then I will happily explain how to calculate the expense for the year.
Sir the question is:
In the year ended 30 September 20X8, Welbeck had sales of $ 7,000,000. Year end receivables amounted to 5% of annual sales. Welbeck wishes to maintain the allowance for receivables at 4% of receivables and as a result discovers that the allowance is 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 is the irrecoverable debt expense for the year?
Can you explain me step by step sir?
OK 🙂
The receivables at the end of the year are 5% x $7M = $350,000.
So the allowance required at the end of the year is 4% x 350,000 = $14,000.This is 20% higher than last year. So for every $100 allowance last year, it must be $120 this year.
So the allowance last year must have been 100/120 x 14,000 = $11,667.This means that it needs to be increased by 14,000 – 11,667 = $2,333
The expense for the year is always:
Increase in allowance + irrecoverable debts written off – irrecoverable debts recovered.So here it is: 2,333 + 3,200 – 450 = $5,083
Sir another question to clear my mind.
At 31 Dec 2004 a company’s trade receivable totalled $ 864 000 and the allowance for receivable was $ 48000.
It was decided that debts totalling $ 13000 were to be written off, and the allowance for receivables adjusted to 5% of the receivables.
What figures should appear in the statement of financial position for trade receivables( after deducting the allowance)?
After writing off the irrecoverables, the receivables is 864000 – 13000 = 851,000.
Therefore the allowance required is 5% x 851,000 = 42,550.
So the increase in the allowance is -5450 (i.e. a decrease)
So the expense for the year is -5450+13000 = 7550.
(The free lectures on irrecoverable and doubtful debts will help you)
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