Discuss whether the doubtful debt allowance in the books of Lux Ltd, relating toSilver Ltd is appropriate at 31 December 2017. Ignore deffered tax. please help i dont understand

Question

At 31 December 2017 a debtor, Silver Ltd, owing R 1 000 000 at that date, indicated that it would not be able to meet its full obligation and as a result, Lux Ltd recognized a doubtful debt allowance of R 500 000. However, Silver Ltd secured a significant contract in January 2018 and managed to settle the full amount due on 20 February 2018.

in addition to the doubtful debt allowance relating to Silver Ltd , Lux Ltd has recognized an allowance for other uncollectible debts amounting to R 150 000.

Answer 1

The doubtful debt allowance is appropriate to record on Lux Ltd.'s books because at that point, they are informed that they will have a material loss. When the annual financial statements are released, this loss will show. In February, however, when Lux Ltd. collects the full amount owed, they can reverse the doubtful debt entry and record the cash received.

The key here is the timing that Lux Ltd. was informed of the uncollectible amount, and the size (materiality) of the uncollectible amount. If Lux Ltd. was only going to be out R 200 or so instead of R 500,000, it might not be worth it to record the doubtful debt and then reverse it. The cost of doing so far outweighs the benefits to financial statement users.