Question 19 36. C3. An increase in an allowance for doubtful debts has been trea

Question

Question 19 36. C3. An increase in an allowance for doubtful debts has been treated as a Not yet answered Marked out of 1.00 P Flag question Select one reduction in the financial statements. The amount is RM8,000. Which of the following explains the resulting effects? O a. Net profit overstated by RM16,000, receivables overstated by RM16,000 O b. Net profit understated by RM16,000, receivables understated by RM16,000 O c. Gross profit overstated by RM16,000, receivables overstated by RM16,000 O d. Net profit is overstated by RM16,000, receivables overstated by RM8,000

Explanation / Answer

Question 36.

The increase in allowance for doubtful debts is charged to profit which results in decrease of profit and it is also shown as reduction from accounts receivable. In this case increase in allowance for doubtful debts is wrongly shown as reduction in allowance for doubtful debts which resulted in overstatement of profit by twice the amount shown as reduction and also overstatement of accounts receivable by twice the amount shown as reduction.

This means the net profit is overstated by RM16,000 and receivable is also overstated by RM16,000.

Correct answer: Option a.

Question 8.

In allowance method, the allowance for bad debts are estimated as percent of accounts receivable and are charged to net profit. The bad debts are written off against the balance in allowance for doubtful debts. Then at the end of the year again the allowance for doubtful debts are estimated as percent of account receivable and the difference between estimated allowance for doubtful debts and balance in allowance for doubtful debts is charged to statement of comprehensive income.

Here bad debts of RM1,600 are written off by debiting the allowance for doubtful debts and crediting the accounts receivable. The balance in allowance for doubtful debts is RM440 (debit) (RM1,160-1,600) and balance in accounts receivable is RM34,000 (RM35,600-RM1,600).

The estimated allownce for doubtful debts is 1% of trade receivable i.e. RM340 (RM34,000*1%). To make the debit balance of allowance for doubtful debts of RM440 to RM340 (credit), we need to credit the allowance for account receivable account by RM780 (RM440 +RM340). This amount is charged as expenses in Statement of comprehensive statement.

Correct answer: RM780.

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.