Irrecoverable debts, recovery of debts, provision/allowance for doubtful debts

1. Trade receivables at 31 December were $28 000. Before preparing the financial statements, a debt of $1600 was written off as irrecoverable. An allowance for doubtful debts of 5% was then created on the remaining receivables. What amount should be shown as trade receivables in the statement of financial position?

A $25 080
B $25 200
C $26 400
D $26 680

2. Trade receivables were $40 000. An existing allowance for doubtful debts was $1500. A debt of $2500 was written off. The allowance was then adjusted to 4% of the remaining receivables. What was the total charge to the income statement?

A $1500
B $2500
C $3000
D $4000

3. A business had trade receivables of $60 000 and an allowance for doubtful debts of $3600. A debt of $4000 was written off. The allowance was then reduced to 5% of remaining receivables. What amount was credited to the income statement for the change in allowance?

A $600
B $800
C $1000
D $1200

4. Which double entry records an irrecoverable debt written off?

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

5. Which double entry records the creation of an allowance for doubtful debts for the first time?

A Debit allowance for doubtful debts, credit income statement
B Debit income statement, credit allowance for doubtful debts
C Debit trade receivables, credit allowance for doubtful debts
D Debit allowance for doubtful debts, credit trade receivables

6. Which double entry records an increase in the allowance for doubtful debts?

A Debit income statement, credit allowance for doubtful debts
B Debit allowance for doubtful debts, credit income statement
C Debit trade receivables, credit income statement
D Debit income statement, credit trade receivables

7. Which double entry records a decrease in the allowance for doubtful debts?

A Debit income statement, credit allowance for doubtful debts
B Debit allowance for doubtful debts, credit income statement
C Debit trade receivables, credit allowance for doubtful debts
D Debit allowance for doubtful debts, credit trade receivables

8. A debt of $900 previously written off as irrecoverable is later recovered by cheque. Which double entry records the recovery?

A Debit bank, credit trade receivables
B Debit bank, credit irrecoverable debts recovered
C Debit trade receivables, credit bank
D Debit irrecoverable debts, credit bank

9. A debt of $1200 was written off during the year. Later in the same year, $500 was recovered from the customer. What is the net effect on profit?

A Profit decreases by $700
B Profit decreases by $1200
C Profit increases by $500
D Profit decreases by $1700

10. Trade receivables are $75 000 before writing off debts. Debts of $5000 are written off. The allowance for doubtful debts is then calculated at 3% of remaining receivables. What is the closing allowance?

A $2100
B $2250
C $2400
D $2500

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. Opening allowance for doubtful debts was $2400. Closing allowance required is $3100. Irrecoverable debts written off during the year were $1800. What is the total expense in the income statement?

A $700
B $1800
C $2500
D $4900

12. Opening allowance for doubtful debts was $5000. Closing allowance required is $4200. Irrecoverable debts written off during the year were $1900. What is the net expense in the income statement?

A $1100
B $1900
C $2700
D $6100

13. Trade receivables at year-end were $36 000. This included a debt of $2000 considered irrecoverable and a debt of $4000 considered doubtful at 25%. General allowance is 5% of the remaining receivables after deducting the irrecoverable debt and the specifically doubtful debt. What is the total allowance required?

A $1500
B $1700
C $2500
D $2800

14. A customer owing $1500 is declared bankrupt. The business expects to receive 40 cents in the dollar. What amount should be written off as irrecoverable?

A $600
B $900
C $1100
D $1500

15. A customer owing $2400 is expected to pay only 25% of the debt. Which amount should remain as a receivable?

A $600
B $1800
C $2400
D nil

16. A debt of $700 was written off as irrecoverable but was wrongly debited to allowance for doubtful debts and credited to trade receivables. What is the effect on profit?

A Profit overstated by $700
B Profit understated by $700
C Profit overstated by $1400
D No effect on profit

17. A business wrote off a debt of $1200 but forgot to reduce trade receivables. What is the effect?

A Profit overstated and assets overstated by $1200
B Profit understated and assets understated by $1200
C Profit correctly stated and assets overstated by $1200
D Profit understated and assets overstated by $1200

18. An increase in allowance for doubtful debts of $450 was omitted. What is the effect?

A Profit overstated and assets overstated by $450
B Profit understated and assets understated by $450
C Profit overstated and liabilities understated by $450
D Profit understated and assets overstated by $450

19. A decrease in allowance for doubtful debts of $300 was omitted. What is the effect?

A Profit overstated and assets understated by $300
B Profit understated and assets understated by $300
C Profit understated and assets overstated by $300
D Profit overstated and assets overstated by $300

20. Which item reduces trade receivables directly?

A Increase in allowance for doubtful debts
B Irrecoverable debt written off
C Discount received
D Decrease in allowance for doubtful debts

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. Which item reduces the carrying amount of trade receivables but does not reduce the trade receivables ledger balance directly?

A Bad debt written off
B Allowance for doubtful debts
C Sales returns
D Cash received from customers

22. Trade receivables were $50 000. Allowance for doubtful debts was $2500. A debt of $3000 was written off after the allowance had been calculated, but the allowance was not adjusted. What is the carrying amount of receivables after the write-off?

A $44 500
B $45 000
C $47 000
D $47 500

23. Trade receivables at the year-end were $80 000. A debt of $6000 was to be written off. An allowance of 2.5% was required on the remaining receivables. Existing allowance was $2000. What amount is shown in the income statement for allowance adjustment?

A $150 debit
B $150 credit
C $1850 debit
D $1850 credit

24. A business had an allowance for doubtful debts of $1600. At the year-end, trade receivables after writing off irrecoverable debts were $30 000. The allowance required was 6%. What is the effect on profit?

A Profit decreases by $200
B Profit increases by $200
C Profit decreases by $1800
D Profit increases by $1800

25. A business had an allowance for doubtful debts of $2600. At the year-end, trade receivables after writing off irrecoverable debts were $40 000. The allowance required was 5%. What is the effect on profit?

A Profit decreases by $600
B Profit increases by $600
C Profit decreases by $2000
D Profit increases by $2000

26. A business recovers $800 from a debt written off in a previous year. What is the effect on current year profit and assets?

A Profit increases and assets increase by $800
B Profit decreases and assets increase by $800
C Profit increases and assets decrease by $800
D No effect on profit, assets increase by $800

27. A recovered debt of $450 was wrongly credited to the customer’s account instead of irrecoverable debts recovered. What is the effect?

A Profit overstated and trade receivables understated by $450
B Profit understated and trade receivables understated by $450
C Profit understated and trade receivables overstated by $450
D Profit overstated and trade receivables overstated by $450

28. A debt of $1000 was recovered after being written off. The receipt was correctly debited to bank but no credit entry was made. Which account should be credited?

A Trade receivables
B Sales
C Irrecoverable debts recovered
D Allowance for doubtful debts

29. Which statement about an allowance for doubtful debts is correct?

A It is deducted from trade payables in the statement of financial position.
B It is deducted from trade receivables in the statement of financial position.
C It is added to sales in the income statement.
D It is treated as a current liability owed to customers.

30. Why is an allowance for doubtful debts created?

A To record debts that are definitely irrecoverable
B To apply prudence by recognising possible losses from doubtful receivables
C To reduce credit sales in the sales journal
D To increase cash received from customers

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. Trade receivables were $100 000. A specific debt of $10 000 was 60% doubtful. A general allowance of 4% was required on the remaining receivables. What total allowance was required?

A $3600
B $6000
C $9600
D $10 000

32. Trade receivables were $45 000. A debt of $5000 was written off. A specific allowance of 50% was made against a remaining debt of $3000. A general allowance of 2% was made against the remaining receivables after excluding the specifically doubtful debt. What total allowance was required?

A $2240
B $2300
C $2340
D $2400

33. Opening allowance was $1800. Closing allowance required was $2400. During the year, irrecoverable debts of $900 were written off and recovered debts were $300. What is the net effect on profit?

A Profit decreases by $1200
B Profit decreases by $900
C Profit decreases by $1500
D Profit decreases by $1800

34. Opening allowance was $3000. Closing allowance required was $2200. Irrecoverable debts written off were $1700. Debts recovered were $400. What is the net effect on profit?

A Profit decreases by $500
B Profit decreases by $900
C Profit decreases by $1300
D Profit increases by $500

35. A business makes no allowance for doubtful debts, although some debts are doubtful. Which accounting concept is most clearly not being applied?

A Business entity
B Consistency
C Prudence
D Money measurement

36. Which statement is correct when an irrecoverable debt is written off?

A Trade receivables decrease and profit decreases.
B Trade receivables decrease and profit increases.
C Trade payables decrease and profit decreases.
D Trade receivables remain unchanged and profit decreases.

37. Which statement is correct when allowance for doubtful debts increases?

A Trade receivables ledger decreases directly.
B Net trade receivables decrease and profit decreases.
C Net trade receivables increase and profit increases.
D Trade payables increase and profit decreases.

38. Which statement is correct when allowance for doubtful debts decreases?

A Profit increases and net trade receivables increase.
B Profit decreases and net trade receivables decrease.
C Profit increases and trade receivables ledger decreases.
D Profit decreases and trade payables increase.

39. Trade receivables were $32 000. A debt of $2000 was written off after calculating an allowance of 5% on $32 000. What error has been made in the allowance if it should have been calculated after the write-off?

A Allowance overstated by $100
B Allowance understated by $100
C Allowance overstated by $1600
D No error

40. A business wrote off debts of $2500 and increased the allowance for doubtful debts by $600. Debts recovered were $400. What is the overall effect on profit?

A Profit decreases by $2700
B Profit decreases by $3100
C Profit decreases by $3500
D Profit increases by $2300

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. At the start of the year, allowance for doubtful debts was $1200. At the end of the year, trade receivables were $25 000 before writing off a bad debt of $1000. The allowance required was 4% of the remaining receivables. What amount is transferred to the income statement for allowance?

A Debit $240
B Credit $240
C Debit $960
D Credit $960

42. Trade receivables after write-offs were $54 000. The allowance for doubtful debts brought down was $2100. The business required an allowance of 3% of receivables. What is the income statement adjustment?

A Debit $480
B Credit $480
C Debit $1620
D Credit $1620

43. A business has receivables of $39 000 after writing off bad debts. Existing allowance is $2200. Required allowance is 5%. What is the correct adjustment?

A Debit income statement $250
B Credit income statement $250
C Debit income statement $1950
D Credit income statement $1950

44. A customer owing $800 is declared irrecoverable. An allowance of $80 had already been made for this customer as part of the allowance for doubtful debts. What is the correct treatment when writing off the debt under O Level accounting treatment?

A Debit irrecoverable debts $800, credit trade receivables $800
B Debit allowance $800, credit trade receivables $800
C Debit irrecoverable debts $720, credit trade receivables $720
D Debit allowance $80, debit irrecoverable debts $720, credit trade receivables $800

45. Trade receivables are $20 000 and allowance for doubtful debts is $1000. A debt of $500 is written off. The allowance is then maintained at 5% of remaining receivables. What is the total income statement charge?

A $475
B $500
C $975
D $1000

46. Trade receivables are $90 000. Allowance brought down is $4500. Bad debts of $8000 are written off. The allowance is then adjusted to 5% of remaining receivables. What is the net charge or credit for the allowance adjustment?

A Charge $400
B Credit $400
C Charge $4100
D Credit $4100

47. Trade receivables after write-offs are $70 000. The allowance is increased from 3% to 4% of trade receivables. What is the extra charge to the income statement?

A $700
B $2100
C $2800
D $4900

48. Trade receivables after write-offs are $64 000. The allowance is decreased from 6% to 4% of trade receivables. What amount is credited to the income statement?

A $1280
B $2560
C $3840
D $6400

49. A business had no allowance for doubtful debts. At the year-end, trade receivables were $44 000. A debt of $4000 was written off. A 2% allowance was then created on the remaining receivables. What was the total reduction in profit?

A $800
B $4000
C $4800
D $4880

50. Which statement is most accurate?

A Irrecoverable debts are estimated losses, while allowances are definite losses.
B Irrecoverable debts are definite losses, while allowances are estimates for doubtful receivables.
C Both irrecoverable debts and allowances are added to trade receivables.
D Recovery of a debt previously written off reduces profit.

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
   Trade receivables after write-off = 28 000 − 1600 = 26 400
   Allowance = 5% × 26 400 = 1320
   Net trade receivables = 26 400 − 1320 = $25 080

2. B
   Trade receivables after write-off = 40 000 − 2500 = 37 500
   Required allowance = 4% × 37 500 = 1500
   Existing allowance was already 1500, so no adjustment.
   Total income statement charge = bad debt only = $2500

3. B
   Trade receivables after write-off = 60 000 − 4000 = 56 000
   Required allowance = 5% × 56 000 = 2800
   Old allowance = 3600
   Decrease in allowance = 800, credited to income statement.

4. B
   Irrecoverable debt written off:
   Debit irrecoverable debts
   Credit trade receivables

5. B
   Creating allowance for the first time:
   Debit income statement
   Credit allowance for doubtful debts

6. A
   Increase in allowance is an expense:
   Debit income statement
   Credit allowance for doubtful debts

7. B
   Decrease in allowance is income/reduction in expense:
   Debit allowance for doubtful debts
   Credit income statement

8. B
   Recovery of a debt previously written off:
   Debit bank
   Credit irrecoverable debts recovered

9. A
   Debt written off = profit decreases $1200
   Recovery = profit increases $500
   Net effect = profit decreases $700

10. A
    Trade receivables after write-off = 75 000 − 5000 = 70 000
    Closing allowance = 3% × 70 000 = $2100

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. C
    Increase in allowance = 3100 − 2400 = 700
    Irrecoverable debts = 1800
    Total expense = 1800 + 700 = $2500

12. A
    Allowance decreased = 5000 − 4200 = 800 credit
    Irrecoverable debts = 1900 expense
    Net expense = 1900 − 800 = $1100

13. C
    Specific doubtful debt allowance = 25% × 4000 = 1000
    General allowance = 5% × (36 000 − 2000 − 4000)
    = 5% × 30 000 = 1500
    Total allowance = 1000 + 1500 = $2500

14. B
    Expected receipt = 40% × 1500 = 600
    Amount written off = 1500 − 600 = $900

15. A
    Expected payment = 25% × 2400 = $600
    That amount remains as receivable.

16. A
    The debt should have been debited to irrecoverable debts expense. Instead, it was debited to allowance.
    Expense was not recorded, so profit is overstated by $700.

17. C
    If the bad debt expense was recorded but trade receivables were not reduced, profit is correct but assets are overstated by $1200.

18. A
    Increase in allowance should reduce profit and reduce net receivables. If omitted, profit and assets are overstated by $450.

19. B
    Decrease in allowance should increase profit and increase net receivables. If omitted, profit and assets are understated by $300.

20. B
    An irrecoverable debt written off directly reduces the customer’s trade receivable balance.

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. B
    Allowance for doubtful debts reduces the carrying amount of receivables, but it does not remove balances from the sales ledger directly.

22. A
    Receivables after write-off = 50 000 − 3000 = 47 000
    Allowance remains = 2500
    Carrying amount = 47 000 − 2500 = $44 500

23. B
    Receivables after write-off = 80 000 − 6000 = 74 000
    Required allowance = 2.5% × 74 000 = 1850
    Existing allowance = 2000
    Decrease = $150 credit to income statement

24. A
    Required allowance = 6% × 30 000 = 1800
    Existing allowance = 1600
    Increase = 200, so profit decreases by $200.

25. B
    Required allowance = 5% × 40 000 = 2000
    Existing allowance = 2600
    Decrease = 600, so profit increases by $600.

26. A
    Recovery of a debt previously written off increases bank and creates income. Profit and assets both increase by $800.

27. B
    The recovered debt should be income. Crediting the customer’s account instead understates profit and understates trade receivables.

28. C
    The missing credit should go to irrecoverable debts recovered.

29. B
    Allowance for doubtful debts is deducted from trade receivables in the statement of financial position.

30. B
    Allowance is created for prudence: possible losses from doubtful debts are recognised before they become certain.

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. C
    Specific allowance = 60% × 10 000 = 6000
    General allowance = 4% × 90 000 = 3600
    Total allowance = 6000 + 3600 = $9600

32. A
    Receivables after write-off = 45 000 − 5000 = 40 000
    Specific allowance = 50% × 3000 = 1500
    General allowance = 2% × (40 000 − 3000) = 740
    Total allowance = 1500 + 740 = $2240

33. A
    Increase in allowance = 2400 − 1800 = 600 expense
    Bad debts = 900 expense
    Recovered debts = 300 income
    Net decrease in profit = 600 + 900 − 300 = $1200

34. A
    Decrease in allowance = 3000 − 2200 = 800 income
    Bad debts = 1700 expense
    Recovered debts = 400 income
    Net decrease in profit = 1700 − 800 − 400 = $500

35. C
    Not making allowance for doubtful debts ignores prudence. Doubtful losses should be recognised.

36. A
    Writing off an irrecoverable debt decreases trade receivables and decreases profit.

37. B
    An increase in allowance reduces net receivables and reduces profit.

38. A
    A decrease in allowance increases profit and increases net trade receivables.

39. A
    Allowance calculated wrongly = 5% × 32 000 = 1600
    Correct allowance = 5% × 30 000 = 1500
    Allowance overstated by $100.

40. A
    Bad debts written off = 2500 expense
    Allowance increase = 600 expense
    Recovered debts = 400 income
    Net profit decrease = 2500 + 600 − 400 = $2700

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. B
    Receivables after write-off = 25 000 − 1000 = 24 000
    Required allowance = 4% × 24 000 = 960
    Old allowance = 1200
    Decrease = 240 credit to income statement.

42. B
    Required allowance = 3% × 54 000 = 1620
    Existing allowance = 2100
    Decrease = 480 credit to income statement.

43. B
    Required allowance = 5% × 39 000 = 1950
    Existing allowance = 2200
    Decrease = 250 credit to income statement.

44. A
    O Level treatment normally writes off the full debt separately:
    Debit irrecoverable debts $800
    Credit trade receivables $800
    The allowance is adjusted separately later.

45. A
    Receivables after write-off = 20 000 − 500 = 19 500
    Required allowance = 5% × 19 500 = 975
    Old allowance = 1000
    Decrease in allowance = 25 credit
    Net income statement charge = 500 − 25 = $475

46. B
    Receivables after write-off = 90 000 − 8000 = 82 000
    Required allowance = 5% × 82 000 = 4100
    Old allowance = 4500
    Decrease = $400 credit.

47. A
    Old allowance = 3% × 70 000 = 2100
    New allowance = 4% × 70 000 = 2800
    Extra charge = $700.

48. A
    Old allowance = 6% × 64 000 = 3840
    New allowance = 4% × 64 000 = 2560
    Decrease credited = 3840 − 2560 = $1280

49. C
    Receivables after write-off = 44 000 − 4000 = 40 000
    Allowance = 2% × 40 000 = 800
    Total profit reduction = 4000 + 800 = $4800

50. B
    Irrecoverable debts are definite losses. Allowances are estimates for doubtful receivables.

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.