ICAEW AF · Chapter 10
Irrecoverable debts and allowances for receivables MCQs with Answers
9 multiple-choice questions on Irrecoverable debts and allowances for receivables for ICAEW AF Accounting Fundamentals. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A business decides that a debt of £720 owed by a customer who has disappeared will never be recovered. What is the double entry to write off the debt?
- A) Debit Trade receivables £720, Credit Irrecoverable debts expense £720
- B) Debit Irrecoverable debts expense £720, Credit Trade receivables £720
- C) Debit Revenue £720, Credit Trade receivables £720
- D) Debit Allowance for receivables £720, Credit Irrecoverable debts expense £720
Show answer & explanation
Answer: B) Debit Irrecoverable debts expense £720, Credit Trade receivables £720
Writing off an irrecoverable debt removes the asset, so trade receivables are credited. The loss is recognised as an expense in profit or loss by debiting irrecoverable debts expense. Revenue is not reversed because the sale did take place.
Question 2
A customer whose debt of £540 was written off as irrecoverable in a previous year unexpectedly pays the £540 in full. What double entry records the receipt, assuming the debt is not reinstated?
- A) Debit Cash £540, Credit Irrecoverable debts expense £540
- B) Debit Cash £540, Credit Revenue £540
- C) Debit Cash £540, Credit Trade receivables £540
- D) Debit Trade receivables £540, Credit Irrecoverable debts expense £540
Show answer & explanation
Answer: A) Debit Cash £540, Credit Irrecoverable debts expense £540
The debt was removed from receivables when it was written off, so there is no receivable to credit. The cash received is debited to the bank account, and the credit is made to the irrecoverable debts expense account, reducing the charge (or creating income) in the current year.
Question 3
At the year end, a business's trade receivables total £86,400 before a debt of £2,400 is written off. The allowance for receivables is to be 3% of the remaining receivables. The allowance at the start of the year was £2,100. What is the total charge to profit or loss for irrecoverable debts and the allowance for the year?
- A) £2,892
- B) £4,920
- C) £420
- D) £2,820
Show answer & explanation
Answer: D) £2,820
Receivables after the write-off = £86,400 - £2,400 = £84,000. Required allowance = 3% x £84,000 = £2,520, an increase of £2,520 - £2,100 = £420. Total charge = write-off £2,400 + increase in allowance £420 = £2,820. Only the change in the allowance is charged, not the full closing balance.
Question 4
At the year end, a business has trade receivables of £54,700 and an allowance for receivables of £1,650. How are these presented in the statement of financial position?
- A) Trade receivables of £54,700 within current assets, with the allowance shown only in the notes
- B) Trade receivables of £54,700 within current assets and an allowance of £1,650 within current liabilities
- C) Trade receivables of £56,350 shown within current assets
- D) Trade receivables of £53,050 shown within current assets
Show answer & explanation
Answer: D) Trade receivables of £53,050 shown within current assets
The allowance for receivables is a deduction from the related asset, not a liability. Receivables are presented net: £54,700 - £1,650 = £53,050, within current assets. This reflects the amount the business expects to collect.
Question 5
A business's required allowance for receivables at the year end is lower than the allowance brought forward from the previous year. How is the reduction recorded?
- A) Debit Irrecoverable debts expense, Credit Allowance for receivables
- B) Debit Allowance for receivables, Credit Retained earnings directly
- C) Debit Allowance for receivables, Credit Trade receivables
- D) Debit Allowance for receivables, Credit Irrecoverable debts expense (a credit to profit or loss)
Show answer & explanation
Answer: D) Debit Allowance for receivables, Credit Irrecoverable debts expense (a credit to profit or loss)
Only the movement in the allowance passes through profit or loss. A decrease means the allowance account is debited to reduce the balance, and the irrecoverable debts expense is credited. This reduces the total charge for the year and may result in a net credit to profit or loss.
Question 6
At its year end, a business has trade receivables of £128,500. The following adjustments are needed: 1. A debt of £3,500 is to be written off. 2. An allowance of 50% is to be made against a specific debt of £4,000. 3. A further allowance of 2% is to be made against the remaining receivables. The allowance for receivables brought forward is £3,950. What is the total charge to profit or loss for irrecoverable debts and the allowance?
- A) £3,970
- B) £7,920
- C) £470
- D) £4,050
Show answer & explanation
Answer: A) £3,970
Remaining receivables for the general allowance = £128,500 - £3,500 - £4,000 = £121,000; general allowance = 2% x £121,000 = £2,420. Specific allowance = 50% x £4,000 = £2,000. Total allowance = £4,420, an increase of £470 on the opening £3,950. Total charge = £3,500 + £470 = £3,970.
Question 7
Why does a business make an allowance for receivables, rather than waiting until specific debts are known to be irrecoverable?
- A) So that receivables are not overstated and the expected credit loss is recognised in the period in which the related revenue arises
- B) So that the business can reduce the amount of sales tax it pays
- C) To create a cash reserve to cover customers who do not pay
- D) Because customers with an allowance against them no longer have to pay their debts
Show answer & explanation
Answer: A) So that receivables are not overstated and the expected credit loss is recognised in the period in which the related revenue arises
An allowance reflects the expectation that some receivables will not be collected, so that the asset is shown at the amount expected to be recovered. Under IFRS 9, losses are recognised on an expected credit loss basis, which matches the cost of bad debts to the period in which the sales were made. The allowance is a book entry only: it does not set aside cash, and customers remain legally liable.
Question 8
During the year, a business wrote off irrecoverable debts of £1,320 and received £410 from a customer whose debt had been written off two years earlier. The allowance for receivables was £5,600 at the start of the year and is to be £4,750 at the end. What is the net charge to profit or loss for irrecoverable debts for the year?
- A) £1,760
- B) £880
- C) £60
- D) £910
Show answer & explanation
Answer: C) £60
Write-offs increase the charge by £1,320. The allowance falls by £5,600 - £4,750 = £850, which is credited to profit or loss. The recovery of a debt written off in an earlier year is also credited, £410. Net charge = £1,320 - £850 - £410 = £60.
Question 9
What is the effect of writing off an irrecoverable debt on a business's financial statements?
- A) Revenue decreases and cash decreases
- B) Profit decreases and current liabilities increase
- C) Profit decreases and current assets decrease
- D) Profit is unchanged and current assets decrease
Show answer & explanation
Answer: C) Profit decreases and current assets decrease
Writing off a debt debits an expense, reducing profit, and credits trade receivables, reducing current assets. Liabilities are not affected and no cash moves. Revenue is not reduced because the sale was genuinely made; the loss is a separate expense.