Question

In 20X6, Dani Ltd made a net profit of £50,000 after accounting for irrecoverable debts. During 20X6 Dani increased its allowance for receivables by £1,500 and also recovered a debt previously written off amounting to £3,500.

What would the net profit have been prior to accounting for these items?

Answer 1

The net profit of Dani Ltd before accounting for the increase in allowance for receivables and the recovery of a previously written-off debt would have been £48,000.

Step-by-step explanation:

In the scenario provided, Dani Ltd made a net profit of £50,000 in 20X6 after considering irrecoverable debts. However, within this year, an extra allowance for receivables of £1,500 was made, and a debt amounting to £3,500, previously written off, was recovered. To find the net profit before these adjustments, we need to reverse the impact of these items. The increase in allowance for receivables would have decreased profits, hence we add it back, and the recovery of the previously written-off debt would have increased profits, so we subtract it.

The adjusted net profit calculation would be: £50,000 (reported net profit) + £1,500 (increased allowance) - £3,500 (recovered debt) = £48,000 (net profit before adjustments).