Irrecoverable debts and allowance for irrecoverable debts

Topic 13: Irrecoverable Debts and Allowance for Irrecoverable Debts — 50 Hard MCQs

1. A customer owing $2400 is declared irrecoverable.

Which double entry records the write-off?

A Debit irrecoverable debts $2400, credit trade receivables $2400
B Debit trade receivables $2400, credit irrecoverable debts $2400
C Debit allowance for irrecoverable debts $2400, credit trade receivables $2400
D Debit trade receivables $2400, credit allowance for irrecoverable debts $2400

2. A debt of $900 previously written off is recovered by cheque.

Which double entry records the recovery?

A Debit bank $900, credit irrecoverable debts recovered $900
B Debit trade receivables $900, credit bank $900
C Debit irrecoverable debts $900, credit bank $900
D Debit allowance for irrecoverable debts $900, credit bank $900

3. A business creates an allowance for irrecoverable debts of $1600 for the first time.

Which double entry is required?

A Debit allowance for irrecoverable debts $1600, credit income statement $1600
B Debit income statement $1600, credit allowance for irrecoverable debts $1600
C Debit trade receivables $1600, credit allowance for irrecoverable debts $1600
D Debit allowance for irrecoverable debts $1600, credit trade receivables $1600

4. The allowance for irrecoverable debts increases from $2500 to $3100.

What is the effect on profit?

A profit increases by $600
B profit decreases by $600
C profit increases by $3100
D profit decreases by $3100

5. The allowance for irrecoverable debts decreases from $4200 to $3500.

What is the effect on profit?

A profit increases by $700
B profit decreases by $700
C profit increases by $3500
D profit decreases by $4200

6. Trade receivables are $48 000. A debt of $3000 is to be written off. An allowance of 5% is then required on remaining receivables.

What is the closing allowance?

A $2250
B $2400
C $2550
D $3000

7. Trade receivables are $80 000 before writing off a debt of $5000. The existing allowance is $3200. A new allowance of 4% of remaining receivables is required.

What amount is charged or credited to the income statement for the allowance adjustment only?

A $200 credit
B $200 charge
C $3000 charge
D $3200 credit

8. Trade receivables are $60 000. A debt of $4000 is written off. The allowance is to be 6% of remaining receivables. Existing allowance is $2500.

What is the total charge to the income statement including the debt written off?

A $860
B $3360
C $4860
D $7360

9. A business has trade receivables of $96 000. A specific debt of $6000 is irrecoverable. The business maintains an allowance of 5% of remaining receivables. Existing allowance is $4100.

What is the closing net trade receivables figure?

A $85 500
B $90 000
C $91 500
D $95 900

10. A business has trade receivables of $72 000. A debt of $2000 is written off. The allowance is reduced from $4000 to $3500.

What is the total effect on profit?

A profit decreases by $1500
B profit decreases by $2000
C profit decreases by $2500
D profit increases by $500

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Which item is deducted from trade receivables in the statement of financial position?

A irrecoverable debts expense
B allowance for irrecoverable debts
C discount allowed
D credit sales

12. Which account normally has a credit balance?

A irrecoverable debts
B trade receivables
C allowance for irrecoverable debts
D discount allowed

13. A business fails to write off an irrecoverable debt of $1800.

What is the effect?

A profit overstated and trade receivables overstated
B profit understated and trade receivables understated
C profit overstated and liabilities understated
D profit understated and liabilities overstated

14. A business fails to increase the allowance for irrecoverable debts by $900.

What is the effect?

A profit overstated and net trade receivables overstated
B profit understated and net trade receivables understated
C profit overstated and liabilities overstated
D profit understated and assets overstated

15. A business fails to decrease the allowance for irrecoverable debts by $650.

What is the effect?

A profit overstated and net trade receivables overstated
B profit understated and net trade receivables understated
C profit overstated and net trade receivables understated
D profit understated and net trade receivables overstated

16. Trade receivables are $125 000. The allowance for irrecoverable debts is 3%.

What is the net trade receivables figure?

A $3750
B $121 250
C $125 000
D $128 750

17. Trade receivables are $54 000. A debt of $4000 is written off. A 2% allowance is then created.

What is the net trade receivables figure?

A $49 000
B $49 020
C $50 000
D $52 920

18. Trade receivables are $90 000. The allowance is increased from 2% to 5% of trade receivables.

What is the additional expense?

A $1800
B $2700
C $4500
D $6300

19. Trade receivables are $110 000. The allowance is reduced from 6% to 4% of trade receivables.

What is credited to the income statement?

A $2200
B $4400
C $6600
D $10 000

20. A business has an existing allowance of $5000. At the year end, trade receivables are $86 000 and an allowance of 4% is required.

What is the effect on profit?

A profit increases by $1560
B profit decreases by $1560
C profit increases by $3440
D profit decreases by $3440

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. A business writes off a debt of $1200. The debt had already been included when calculating the opening allowance.

What is the correct treatment?

A write off the debt and recalculate closing allowance on remaining receivables
B reduce the allowance only and do not write off the debt
C ignore the debt because an allowance exists
D record the debt as a current liability

22. Which statement about an allowance for irrecoverable debts is correct?

A It removes specific customers from the sales ledger.
B It estimates possible future losses from remaining receivables.
C It is the same as writing off a known irrecoverable debt.
D It increases gross trade receivables.

23. A business writes off a debt of $700 and also increases its allowance by $300.

What is the total charge to the income statement?

A $300
B $400
C $700
D $1000

24. A business writes off a debt of $1500 and decreases its allowance by $400.

What is the net charge to the income statement?

A $400
B $1100
C $1500
D $1900

25. A business recovers $600 from a debt previously written off and increases its allowance by $950.

What is the net effect on profit?

A profit decreases by $350
B profit increases by $350
C profit decreases by $1550
D profit increases by $1550

26. A business recovers $1200 from a previously written-off debt and decreases its allowance by $500.

What is the net effect on profit?

A profit increases by $700
B profit increases by $1700
C profit decreases by $700
D profit decreases by $1700

27. Trade receivables before adjustments are $70 000. Debts of $3000 are written off. The existing allowance is $2200. Closing allowance is to be 5% of remaining receivables.

What is the total charge to the income statement?

A $1150
B $3000
C $3350
D $4150

28. Trade receivables before adjustments are $150 000. Debts of $10 000 are written off. The allowance is to be 2.5% of remaining receivables. Existing allowance is $4800.

What is the total net charge to the income statement?

A $1300
B $8700
C $10 000
D $11 300

29. Trade receivables before adjustments are $42 000. Debts of $2000 are written off. The existing allowance is $2600. New allowance required is 4% of remaining receivables.

What is the net effect on profit?

A profit decreases by $1000
B profit decreases by $2000
C profit decreases by $3000
D profit increases by $1000

30. Trade receivables are $200 000 before writing off $8000. Existing allowance is $7000. New allowance required is 5% of remaining receivables.

What is closing net trade receivables?

A $182 400
B $190 400
C $192 000
D $193 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. A business has trade receivables of $60 000 and an allowance of $2400. A customer owing $1000 is written off, but no change is made to the allowance.

What is net trade receivables after the write-off?

A $56 600
B $57 600
C $59 000
D $60 000

32. A business has trade receivables of $95 000. A debt of $5000 is written off. The allowance remains at $3600.

What is the statement of financial position value of net trade receivables?

A $86 400
B $90 000
C $91 400
D $95 000

33. A business has trade receivables of $40 000 and an allowance of $1600. A previously written-off debt of $900 is recovered.

What is the effect on net trade receivables?

A increases by $900
B decreases by $900
C no effect
D increases by $2500

34. A business recovers $750 from a debt written off in a previous year.

How is this shown in the income statement?

A as an expense
B as income
C as a reduction in trade receivables
D as drawings

35. A trade receivable of $2000 is written off. The business also has an allowance for irrecoverable debts of $5000.

What happens to gross trade receivables?

A decrease by $2000
B decrease by $5000
C increase by $2000
D no effect

36. A trade receivable of $2000 is written off. The allowance remains unchanged.

What happens to net trade receivables?

A decrease by $2000
B decrease by $5000
C increase by $2000
D no effect

37. The allowance for irrecoverable debts is increased by $1400.

What happens to net trade receivables?

A increase by $1400
B decrease by $1400
C no effect
D decrease by total allowance only if debt is written off

38. The allowance for irrecoverable debts is decreased by $800.

What happens to net trade receivables?

A increase by $800
B decrease by $800
C no effect
D decrease by $1600

39. Which concept supports creating an allowance for irrecoverable debts?

A prudence
B realisation
C business entity
D historic cost

40. Which concept supports writing off a known irrecoverable debt immediately?

A prudence
B going concern
C consistency
D money measurement only

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. A business has credit sales of $300 000 and estimates that 2% will be irrecoverable. Existing allowance is $4200. The allowance is based on credit sales.

What should be the closing allowance?

A $1800
B $4200
C $6000
D $10 200

42. Using the information in Question 41, what adjustment is required?

A charge $1800
B credit $1800
C charge $6000
D credit $4200

43. A business uses ageing of receivables to estimate the allowance. The required allowance is calculated as $12 600. The existing allowance is $15 000.

What is the income statement effect?

A charge $2400
B credit $2400
C charge $12 600
D credit $15 000

44. The allowance for irrecoverable debts account has a debit balance of $300 before year-end adjustment. Required closing allowance is $1900.

What amount is charged to the income statement?

A $1600
B $1900
C $2200
D $3000

45. The allowance for irrecoverable debts account has a credit balance of $500 before year-end adjustment. Required closing allowance is $2100.

What amount is charged to the income statement?

A $500
B $1600
C $2100
D $2600

46. The allowance for irrecoverable debts account has a debit balance of $400 before year-end adjustment. Required closing allowance is $2500.

What is the closing balance on the allowance account?

A $400 debit
B $2100 credit
C $2500 credit
D $2900 credit

47. A debt of $1800 is written off after the allowance has been calculated on trade receivables of $50 000. The required allowance rate is 4%.

What is the corrected closing allowance?

A $1800
B $1928
C $2000
D $2072

48. Trade receivables are $76 000. Included in this is a debt of $4000 which is irrecoverable. Existing allowance is $3000. The allowance is to be 5% of remaining receivables.

What is the net income statement charge?

A $600
B $3600
C $4600
D $7600

49. A business has net trade receivables of $57 000 after deducting an allowance of 5% of gross trade receivables.

What are gross trade receivables?

A $54 150
B $57 000
C $60 000
D $62 850

50. A business has gross trade receivables of $88 000. Net trade receivables are $83 600.

What percentage allowance has been made?

A 4%
B 5%
C 6%
D 95%

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. A — Debit irrecoverable debts $2400, credit trade receivables $2400

• Irrecoverable debt is an expense.

• Trade receivables decrease because the customer will not pay.

• Entry:

  • debit irrecoverable debts

  • credit trade receivables

2. A — Debit bank $900, credit irrecoverable debts recovered $900

• The debt was already written off earlier.

• Recovery is treated as income.

• Bank increases, so debit bank.

• Income increases, so credit irrecoverable debts recovered.

3. B — Debit income statement $1600, credit allowance for irrecoverable debts $1600

• Creating allowance reduces profit.

• Allowance is a contra-asset with a credit balance.

• Entry:

  • debit income statement

  • credit allowance

4. B — profit decreases by $600

• Existing allowance = $2500

• New allowance = $3100

• Increase = $600

• Increase in allowance is an expense.

• Profit decreases by $600.

5. A — profit increases by $700

• Existing allowance = $4200

• New allowance = $3500

• Decrease = $700

• Decrease in allowance is credited to income statement.

• Profit increases by $700.

6. A — $2250

• Trade receivables = $48 000

• Less debt written off = $3000

• Remaining receivables = $45 000

• Allowance = 5% × 45 000

• = $2250

7. A — $200 credit

• Trade receivables after write-off = 80 000 – 5000 = $75 000

• New allowance = 4% × 75 000 = $3000

• Existing allowance = $3200

• Allowance decreases by $200

• Income statement is credited by $200.

8. C — $4860

• Trade receivables after write-off = 60 000 – 4000 = $56 000

• Required allowance = 6% × 56 000 = $3360

• Existing allowance = $2500

• Increase in allowance = 3360 – 2500 = $860

• Total charge = debt written off 4000 + increase in allowance 860

• = $4860

9. A — $85 500

• Trade receivables after write-off = 96 000 – 6000 = $90 000

• Allowance = 5% × 90 000 = $4500

• Net trade receivables = 90 000 – 4500

• = $85 500

10. A — profit decreases by $1500

• Debt written off = $2000 expense

• Allowance reduced from $4000 to $3500 = $500 credit to profit

• Net effect = 2000 – 500

• Profit decreases by $1500

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. B — allowance for irrecoverable debts

• Allowance is deducted from gross trade receivables.

• It gives net trade receivables in the statement of financial position.

12. C — allowance for irrecoverable debts

• Allowance for irrecoverable debts is a contra-asset.

• It normally has a credit balance.

13. A — profit overstated and trade receivables overstated

• The debt should have been written off.

• If not:

  • expense is understated

  • profit is overstated

  • trade receivables are overstated

14. A — profit overstated and net trade receivables overstated

• Increasing allowance creates an expense.

• If the increase is not recorded:

  • expense understated

  • profit overstated

  • allowance understated

  • net trade receivables overstated

15. B — profit understated and net trade receivables understated

• Decreasing allowance increases profit.

• If the decrease is not recorded:

  • profit is understated

  • allowance remains too high

  • net receivables are understated

16. B — $121 250

• Allowance = 3% × 125 000 = $3750

• Net trade receivables = 125 000 – 3750

• = $121 250

17. A — $49 000

• Trade receivables after write-off = 54 000 – 4000 = $50 000

• Allowance = 2% × 50 000 = $1000

• Net trade receivables = 50 000 – 1000

• = $49 000

18. B — $2700

• Old allowance = 2% × 90 000 = $1800

• New allowance = 5% × 90 000 = $4500

• Additional expense = 4500 – 1800

• = $2700

19. A — $2200

• Old allowance = 6% × 110 000 = $6600

• New allowance = 4% × 110 000 = $4400

• Decrease = 6600 – 4400

• = $2200 credited to income statement

20. A — profit increases by $1560

• Required allowance = 4% × 86 000 = $3440

• Existing allowance = $5000

• Allowance decreases by 5000 – 3440 = $1560

• Profit increases by $1560

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. A — write off the debt and recalculate closing allowance on remaining receivables

• A known irrecoverable debt must be written off.

• The allowance is then calculated on the remaining receivables.

• The existence of an allowance does not cancel the need to write off a specific bad debt.

22. B — It estimates possible future losses from remaining receivables

• Allowance is an estimate.

• It is not the same as writing off a specific known debt.

• It reduces net receivables.

23. D — $1000

• Debt written off = $700 expense

• Increase in allowance = $300 expense

• Total charge = 700 + 300

• = $1000

24. B — $1100

• Debt written off = $1500 expense

• Decrease in allowance = $400 credit/income effect

• Net charge = 1500 – 400

• = $1100

25. A — profit decreases by $350

• Debt recovered = $600 income

• Increase in allowance = $950 expense

• Net effect = 950 – 600

• Profit decreases by $350

26. B — profit increases by $1700

• Debt recovered = $1200 income

• Decrease in allowance = $500 income effect

• Total profit increase = 1200 + 500

• = $1700

27. D — $4150

• Trade receivables after write-off = 70 000 – 3000 = $67 000

• Required allowance = 5% × 67 000 = $3350

• Existing allowance = $2200

• Increase in allowance = 3350 – 2200 = $1150

• Total charge = debt written off 3000 + allowance increase 1150

• = $4150

28. B — $8700

• Trade receivables after write-off = 150 000 – 10 000 = $140 000

• Required allowance = 2.5% × 140 000 = $3500

• Existing allowance = $4800

• Allowance decreases by $1300

• Net charge = debt written off 10 000 – allowance decrease 1300

• = $8700

29. A — profit decreases by $1000

• Trade receivables after write-off = 42 000 – 2000 = $40 000

• Required allowance = 4% × 40 000 = $1600

• Existing allowance = $2600

• Allowance decreases by $1000

• Debt written off = $2000 expense

• Net effect = 2000 – 1000

• Profit decreases by $1000

30. A — $182 400

• Trade receivables after write-off = 200 000 – 8000 = $192 000

• Required allowance = 5% × 192 000 = $9600

• Net trade receivables = 192 000 – 9600

• = $182 400

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. A — $56 600

• Trade receivables after write-off = 60 000 – 1000 = $59 000

• Allowance remains = $2400

• Net trade receivables = 59 000 – 2400

• = $56 600

32. A — $86 400

• Trade receivables after write-off = 95 000 – 5000 = $90 000

• Allowance = $3600

• Net trade receivables = 90 000 – 3600

• = $86 400

33. C — no effect

• A previously written-off debt is no longer in trade receivables.

• Recovery is recorded as income and bank.

• Net trade receivables do not change.

34. B — as income

• Recovery of a previously written-off debt is income.

• It is credited to irrecoverable debts recovered.

35. A — decrease by $2000

• Writing off a trade receivable removes it from gross receivables.

• Gross trade receivables decrease by $2000.

36. A — decrease by $2000

• Gross trade receivables decrease by $2000.

• Allowance remains unchanged.

• Net trade receivables also decrease by $2000.

37. B — decrease by $1400

• Increase in allowance reduces net trade receivables.

• Net receivables decrease by $1400.

38. A — increase by $800

• Decrease in allowance means less deduction from receivables.

• Net trade receivables increase by $800.

39. A — prudence

• Prudence avoids overstating assets and profit.

• Possible irrecoverable debts are recognised through an allowance.

40. A — prudence

• A known irrecoverable debt should be written off immediately.

• This prevents profit and receivables being overstated.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. C — $6000

• Allowance is based on credit sales.

• Required allowance = 2% × 300 000

• = $6000

42. A — charge $1800

• Required allowance = $6000

• Existing allowance = $4200

• Increase = 6000 – 4200

• = $1800 charge

43. B — credit $2400

• Existing allowance = $15 000

• Required allowance = $12 600

• Decrease = 15 000 – 12 600

• = $2400 credited to income statement

44. C — $2200

• Allowance account has debit balance of $300.

• Required closing balance = $1900 credit.

• To move from $300 debit to $1900 credit:

• Charge = 300 + 1900

• = $2200

45. B — $1600

• Existing allowance = $500 credit

• Required allowance = $2100 credit

• Increase = 2100 – 500

• = $1600 charged

46. C — $2500 credit

• The required closing allowance is $2500.

• The allowance account must end with a $2500 credit balance.

• The adjustment would be $2900, but the question asks for closing balance.

47. B — $1928

• Debt written off after allowance calculation = $1800

• Correct trade receivables = 50 000 – 1800 = $48 200

• Correct allowance = 4% × 48 200

• = $1928

48. C — $4600

• Trade receivables after write-off = 76 000 – 4000 = $72 000

• Required allowance = 5% × 72 000 = $3600

• Existing allowance = $3000

• Increase in allowance = $600

• Debt written off = $4000

• Total charge = 4000 + 600

• = $4600

49. C — $60 000

• Net trade receivables = 95% of gross receivables

• 57 000 = 95% of gross

• Gross = 57 000 / 0.95

• = $60 000

50. B — 5%

• Allowance = gross receivables – net receivables

• = 88 000 – 83 600 = $4400

• Percentage allowance = 4400 / 88 000 × 100

• = 5%

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.