Question
The adjusted trial balance of Fairhaven Trading at December 31, 2025 is shown below.
| Account | Debit | Credit |
|---|
| Cash | 50,800 | |
| Accounts Receivable | 54,000 | |
| Allowance for Doubtful Accounts | | 3,800 |
| Inventory | 38,500 | |
| Prepaid Insurance | 2,400 | |
| Equipment | 66,000 | |
| Accumulated Depreciation - Equipment | | 19,800 |
| Accounts Payable | | 24,600 |
| Interest Payable | | 600 |
| Income Taxes Payable | | 1,500 |
| Notes Payable (due 2028) | | 18,000 |
| Share Capital - Ordinary | | 80,000 |
| Retained Earnings (January 1) | | 33,400 |
| Sales Revenue | | 290,000 |
| Sales Returns and Allowances | 6,000 | |
| Cost of Goods Sold | 174,000 | |
| Salaries and Wages Expense | 43,000 | |
| Rent Expense | 14,400 | |
| Bad Debt Expense | 2,900 | |
| Depreciation Expense | 6,600 | |
| Insurance Expense | 1,200 | |
| Interest Expense | 1,900 | |
| Income Tax Expense | 10,000 | ____ |
| 471,700 | 471,700 |
Instructions:
- Prepare a multi-step income statement for the year ended December 31, 2025.
- Prepare a classified statement of financial position at December 31, 2025, showing accounts receivable at its gross amount less the allowance for doubtful accounts. (Retained earnings must be updated for the year's net income; no dividends were declared.)
Statements in this challenge
- Income StatementIncome Statement
- Statement of Financial PositionBalance Sheet
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IFRS 9 — expected credit losses
The allowance is an estimate of receivables that will not be collected, recognised before any specific account is known to have failed. Keep the two mechanics apart: setting or adjusting the allowance affects profit, whereas writing a specific account off against an existing allowance does not.
Common mistakes
- Recording the full estimate as the expense when the allowance already carries a balance — under the balance-sheet approach the entry is the movement needed, not the target.
- Taking a write-off of a specific debt to expense a second time when an allowance already exists.
- Reducing the receivable directly and leaving no allowance account, which loses the gross amount.