At the year end trade receivables are £85,000. A debt of £3,000 is to be written off as irrecoverable. The allowance for receivables is to be 5% of the remaining receivables. The opening allowance was £3,200. What is the total charge to the statement of profit or loss for irrecoverable debts and the allowance?
Answer and explanation
Correct answer: D. £3,900
- Step 1: Receivables after write-off = £85,000 − £3,000 = £82,000.
- Step 2: Required allowance = 5% × £82,000 = £4,100; the opening allowance was £3,200, so the increase is £900.
- Step 3: Total charge = £3,000 irrecoverable debt + £900 increase in allowance = £3,900.
Answer
£3,900.
Why not the others: £7,100: This ignores the opening allowance. Only the increase in the allowance is charged. £4,050: This calculates the allowance on £85,000, forgetting to deduct the £3,000 written off first. £900: This omits the £3,000 irrecoverable debt written off, which is also an expense.
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