Credit Control Question

hkr

Struggling with an exam question, hope somebody can help!

A company is owed £55200 inc VAT, it is credit insured. How much should the company make a credit insurance claim for, make a provision for and claim VAT for?

Answers: Credit insurance claim = £36800

Provision = £9200

VAT claim= £9200

Why?

CeeJaySix

£9,200 is the VAT element (£55,200 gross / 120 x 20).

Output VAT on bad debts is recoverable from HMRC. Therefore the balance (ie. the net bad debt) is claimed from the insurance company.

The need for a provision for the VAT I would guess is to do with how the question is worded - has the debtor gone into liquidation or similar?

SandyHood

The circumstances would need to be that the debtor has been identified as a bad debt. Typically this means the debtor is insolvent and no longer trading.
We currently have a debit balance on our accounts receivable ledger of £55,200
To write this off:

1. Claim the VAT back (which would have been included in our VAT return relating to the sale)
   Debit VAT £9,200 (20% of the net value of the sale £46,000)
   Credit the Receivable account of the insolvent customer
   
2. Make a claim from the credit insurer (this is typically 80% of all the accounts receivable (although there are other arrangements that can be made)
   Debit Insurance claim receivable £36,800 (80% x £46,000 debt)
   Credit Receivable account of insolvent customer
   
3. This leaves the uninsured part of the debt (20% of £46,000)
   Debit Bad Debt (your answer says provision but it could be written off to the PorL) £9,200
   Credit Receivable account of insolvent customer

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