ExpertEasy1 markMultiple Choice
ACCA · Question 64 · The Use of Double-Entry and Accounting Systems
Section B - Case 2
Scenario: EcoBuild Ltd is preparing financial statements for the year ended 30 September 20X6. Draft profit before tax is $450,000. Adjustments required:
- A machine costing $120,000 bought on 1 April 20X6 was incorrectly expensed in full. Depreciation is 20% straight-line (pro-rata).
- Closing inventory was undervalued by $15,000.
- An allowance for receivables of $8,000 needs to be created.
- Rent of $12,000 paid for the quarter ending 30 November 20X6 was fully expensed.
What is the correct double-entry to record the creation of the allowance for receivables (adjustment 3)?
Section B - Case 2
Scenario: EcoBuild Ltd is preparing financial statements for the year ended 30 September 20X6. Draft profit before tax is $450,000. Adjustments required:
- A machine costing $120,000 bought on 1 April 20X6 was incorrectly expensed in full. Depreciation is 20% straight-line (pro-rata).
- Closing inventory was undervalued by $15,000.
- An allowance for receivables of $8,000 needs to be created.
- Rent of $12,000 paid for the quarter ending 30 November 20X6 was fully expensed.
What is the correct double-entry to record the creation of the allowance for receivables (adjustment 3)?
Answer options:
A.
Debit Allowance for Receivables $8,000; Credit Irrecoverable Debts Expense $8,000
B.
Debit Irrecoverable Debts Expense $8,000; Credit Trade Receivables $8,000
C.
Debit Irrecoverable Debts Expense $8,000; Credit Allowance for Receivables $8,000
D.
Debit Trade Receivables $8,000; Credit Allowance for Receivables $8,000
How to approach this question
Creating an allowance is an expense (Debit P&L). The allowance itself is a credit balance that sits against the Trade Receivables asset.
Full Answer
C.Debit Irrecoverable Debts Expense $8,000; Credit Allowance for Receivables $8,000✓ Correct
To create an allowance for receivables, an expense must be recognized in the statement of profit or loss (Debit Irrecoverable Debts Expense). The corresponding credit goes to the Allowance for Receivables account, which is a contra-asset account that reduces the net trade receivables balance on the statement of financial position.
Common mistakes
Crediting Trade Receivables directly (which is only done for actual write-offs).
Practice the full ACCA FA — Financial Accounting Practice Exam 6
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