ACCA Applied Knowledge · Financial Accounting · Receivables and payables
At the start of the year Marlow Ltd had an allowance for receivables of $4,200. At the year end, trade receivables are $90,000 and the allowance is to be set at 5% of receivables. What is the effect on profit or loss for the year?
The required allowance is $4,500 (5% of $90,000) against an opening balance of $4,200, so the allowance rises by $300. An increase in the allowance is an expense, so profit or loss is charged with $300.
- ACharge of $300
- BCredit of $300Correct
- CCharge of $4,500
- DCredit of $4,200
Explanation
Required allowance is 5% x $90,000 = $4,500. The opening allowance was $4,200, so it must be increased by $300, which is an expense (a charge) to profit or loss. Note that the question asks for the effect: an increase is a charge of $300. Re-reading the options, the correct choice is the charge.
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