Discuss whether the doubtful debt allowance in the books of Lux Ltd, relating to Silver Ltd, is appropriate at 31 December 2017. Ignore deferred tax.

Question

At 31 December 2017 a debtor, Silver Ltd, owing R1 000 000 at that date, indicated that it

would not be able to meet its full obligation, and a s a result, Lux Ltd recognised a doubtful

debt allowance of R500 000 in relation to this debtor. 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 correctly

recognised an allowance for other uncollectible debts, amounting to R150 000.

SARS allows 25% of amounts considered uncollectible, as a deduction for tax purposes.

Answer 1

According to the information provided, the R500 000 in doubtful debt allowed for Silver Ltd at the end of 2017 may have needed to be revised. This is because Silver Ltd. could pay the sum due on February 20, 2018, a little over a month after the conclusion of the fiscal year. This shows that despite declaring otherwise at year's end, Silver Ltd. could pay the loan.

It's crucial to remember that Lux Ltd had good reason to suspect SilverLtd wouldn't be able to fulfill its total commitment when the allowance was recognized. As a result, the provision was made in line with the accounting principle of caution, which states that uncertain occurrences should be accounted for in a manner that is not excessively pessimistic.

There is no evidence that the provision for additional uncollectible debts in the amount of R150 000 needs to be corrected. SARS permits a deduction of 25% from sums deemed uncollectible for tax purposes. Lux Ltd may thus be eligible to claim a tax reduction of R162,500 (25% of the total doubtful debt allowance of R650 000).