Accounting Online Program Certification Practice Test

What were the two factors leading to the recognition of an allowance for a major customer of Robin plc?

1. A new product line and increased taxes

2. Financial difficulties and a fire incident

3. Financial difficulties and late payment

4. Production halt and liquidation

The correct answer is: Financial difficulties and late payment

The recognition of an allowance for a major customer typically arises from assessing the collectability of accounts receivable, particularly when there are indicators that the customer may not fulfill their payment obligations. In this scenario, financial difficulties experienced by the customer signal a risk that payments may be delayed or potentially uncollectible. Additionally, late payment further confirms these concerns, reinforcing the need for Robin plc to establish an allowance. This allowance acts as a precautionary measure on the balance sheet to account for expected losses from accounts receivable, reflecting a more accurate financial position and ensuring compliance with accounting principles regarding prudence and conservatism. By contrast, the other combinations of factors do not directly address the payment reliability of the customer in the context of accounts receivable. For instance, a new product line and increased taxes may impact a company's strategy or profitability but do not inherently relate to the creditworthiness of a specific customer. Similarly, a fire incident might disrupt operations but does not specifically inform the financial condition of that particular customer. Lastly, while a production halt and liquidation might indicate overall distress for a company, they do not provide direct evidence regarding a customer's ability to pay debts owed to Robin plc.