Irrecoverable Debts and Allowance for Receivables

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Questions and Answers

Which of the following is NOT a correct journal entry for the adjustment of the initial trial balance using the columnar approach?

Debit: Irrecoverable Debts Expense, Credit: Allowance for Receivables

Debit: Profit and Loss Ledger Account, Credit: Irrecoverable Debts Expense (correct)

Debit: Allowance for Receivables, Credit: Irrecoverable Debts Expense

Debit: Irrecoverable Debts Expense, Credit: Trade Receivables

If the allowance for receivables has increased, the journal entry will include which of the following?

Debit: Allowance for receivables, Credit: Irrecoverable debts expense

Debit: Irrecoverable debts expense, Credit: Allowance for receivables (correct)

Debit: Trade receivables, Credit: Irrecoverable debts expense

Debit: Irrecoverable debts expense, Credit: Trade receivables

How is the balance of the Irrecoverable Debts Expense Account handled at the end of the reporting period?

It is added to the Allowance for Receivables balance

It is written off as an expense against the Trade Receivables balance

It is transferred to the Profit and Loss Ledger Account (correct)

It is transferred to the Statement of Financial Position

What is the impact on the Statement of Financial Position when the balance on the Allowance for Receivables account is deducted from the balance on the Trade Receivables account?

It decreases total assets on the Statement of Financial Position Signup and view all the answers

What is the purpose of a journal entry to set up an allowance for receivables?

To adjust the initial trial balance for the amount of bad debt expected Signup and view all the answers

What are the two key accounts affected in the journal entry to write off an irrecoverable debt?

Irrecoverable Debts Expense and Trade Receivables Signup and view all the answers

How does a computerised accounting system handle the write-off of a debt?

It updates both the Trade Receivables balance and the customer's personal account simultaneously Signup and view all the answers

What is the rationale behind adjusting the allowance for receivables in subsequent reporting periods?

To reflect changes in the creditworthiness of customers Signup and view all the answers

Which of the following best describes the impact of writing off an irrecoverable debt on the overall financial position of a company?

It decreases the company's net income Signup and view all the answers

In the Allowance for Receivables system, how is the change to the allowance from one reporting period to the next reflected in the financial statements?

It is included as an adjustment to the income statement as an expense or revenue Signup and view all the answers

What is the net effect on profit from Smith's adjustments to the allowance for receivables?

CU 1,200 decrease Signup and view all the answers

For Folland, what is the net charge for irrecoverable debts after the adjustments for the period ended 31 December 20X9?

CU 720 Signup and view all the answers

If Keele decreased its allowance for receivables by CU600 and recovered an irrecoverable debt of CU300, what was the profit before these adjustments?

CU 5,300 Signup and view all the answers

What is Bodkin's irrecoverable debts expense for the year ended 30 June 20X1?

Charge of CU 2,450 Signup and view all the answers

What should Wacko report as irrecoverable debts expense in its statement of profit or loss for the year ended 31 December 20X0?

CU 2,550 Signup and view all the answers

What is the total amount of trade receivables after adjustments?

CU7,927 Signup and view all the answers

How much has the irrecoverable debts expense increased after adjustments?

CU445 Signup and view all the answers

What is the net profit for the year calculated from the adjusted values?

CU49,259 Signup and view all the answers

Which figure accurately reflects the allowance for receivables after the year-end adjustments?

CU250 Signup and view all the answers

What impact does the write-off of CU600 have on the allowance for receivables?

Decreases it by CU600 Signup and view all the answers

What would be the consequence if a cheque received in settlement is dishonoured?

Recognize additional irrecoverable debts Signup and view all the answers

After adjusting the trial balance, what total amount is reflected in the suspense account?

CU128,367 Signup and view all the answers

How is the CU200 received in respect of a debt treated in the financial statements?

Debit to cash at bank and credit to irrecoverable debts expense Signup and view all the answers

What should be the new amount for the allowance for receivables if it were set at CU4,000 and the previous allowance was CU2,000?

Increase by CU2,000 Signup and view all the answers

What is the gross profit calculated before considering expenses and irrecoverable debts?

CU53,600 Signup and view all the answers

A company has decided that a debt of CU1,000 from a customer is irrecoverable. What journal entry should be made to record this write-off?

Debit: Irrecoverable debts expense - CU1,000; Credit: Trade receivables - CU1,000 Signup and view all the answers

A customer pays CU500 towards a debt that was previously written off as irrecoverable. What journal entry should be made to record this receipt?

Debit: Cash at bank - CU500; Credit: Irrecoverable debts expense - CU500 Signup and view all the answers

A company receives a cheque for CU200 from a customer, but the cheque is subsequently dishonoured by the customer's bank. What is the correct journal entry to record this dishonoured payment?

Debit: Trade receivables - CU200; Credit: Cash at bank - CU200 Signup and view all the answers

According to IFRS 9, what is the requirement for companies regarding allowance for receivables?

Companies must create an allowance in the current period for any potential future amounts that will not be recovered from credit customers. Signup and view all the answers

What is the main purpose of writing off an irrecoverable debt?

To record the loss associated with the debt as an expense in the current period. Signup and view all the answers

Which of the following statements is TRUE about the allowance for receivables?

The allowance for receivables is an asset account that is used to reduce the value of the company's receivables to their estimated realizable value. Signup and view all the answers

A company estimates that 2% of its trade receivables will be irrecoverable. If the total trade receivables balance is CU100,000, what is the amount of the allowance for receivables that should be created?

CU2,000 Signup and view all the answers

Why is it essential to maintain an allowance for receivables?

To ensure that the company's financial statements are accurate and reflect the true value of its assets. Signup and view all the answers

What is the primary reason for utilizing an allowance for receivables?

To accurately reflect the expected credit losses on trade receivables. Signup and view all the answers

A company writes off $10,000 in irrecoverable debts. How does this impact the allowance for receivables?

It has no impact on the allowance for receivables, as this is a separate account. Signup and view all the answers

If a company anticipates a lower likelihood of future credit losses compared to the previous period, what adjustment is necessary to the allowance for receivables?

A debit to the allowance for receivables. Signup and view all the answers

The allowance for receivables is classified as a(n):

Contra asset. Signup and view all the answers

How does the allowance for receivables affect the net realizable value of trade receivables?

It decreases the net realizable value by the amount of the allowance. Signup and view all the answers

Which of the following statements accurately describes the relationship between the allowance for receivables and irrecoverable debts?

The allowance for receivables is a predetermined estimate of future irrecoverable debts, while the actual write-offs are recorded as they occur. Signup and view all the answers

ABC Company has a balance of $10,000 in its allowance for receivables. They write off $2,000 in irrecoverable debts. What is the new balance in the allowance for receivables?

$10,000. Signup and view all the answers

A company has a balance of $25,000 in trade receivables and $3,000 in the allowance for receivables. What is the net realizable value of their trade receivables?

$22,000. Signup and view all the answers

A company reduces its allowance for receivables from $5,000 to $3,000. What is the impact on the income statement and balance sheet?

Income statement: Increase in net income; Balance sheet: Decrease in assets. Signup and view all the answers

When a customer's account is deemed irrecoverable, what is the appropriate accounting treatment?

Debit Irrecoverable Debts Expense, Credit Trade Receivables. Signup and view all the answers

Study Notes

Irrecoverable Debts and the Allowance for Receivables

Irrecoverable debts are debts not expected to be paid.
Writing off an irrecoverable debt is expensing the debt.
To write off a debt: Debit Irrecoverable Debts Expense, Credit Trade Receivables.
If cash is received for a written-off debt: Debit Cash at Bank, Credit Irrecoverable Debts Expense.
Allowance for receivables is a provision for potential future non-collection of debts.
- IFRS 9 requires creating an allowance for receivables.
- Accounts for expected credit losses.
- It's a separate account that reduces receivables to prudent valuation.
Setting up or increasing an allowance: Debit Irrecoverable Debts Expense, Credit Allowance for Receivables.
Decreasing an allowance: Debit Allowance for Receivables, Credit Irrecoverable Debts Expense.
Accounts for potential future losses on receivables.
The allowance is netted against trade receivables.
Journal entries adjust trial balances for irrecoverable debts and allowance for receivables.
Accounting for dishonored payments involves reinstating the debt and adjusting cash.
Accounting entries related to the allowance for receivables should not affect the trade receivables account directly.
Irrecoverable debts expense is treated as an administrative expense

Adjusting Initial Trial Balances

Adjusting initial trial balances includes calculating irrecoverable debts and allowance for receivables.
Include columnar approach from Chapter 5 to adjust trial balances.
- Calculate irrecoverable debts expense.
- Determine required allowance for receivables.
- Journal entries for irrecoverable debts and allowance.
- Final trial balance is adjusted.

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Description

This quiz explores the concepts of irrecoverable debts and the allowance for receivables, focusing on journal entries and financial reporting standards like IFRS 9. Test your understanding of how to manage debts that aren't expected to be collected and the provisions for expected credit losses.