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Difficulty: MediumProvision for Discounts on Debtors and Creditors

At the end of the financial year, Adebayo Stores extracted the following balances from its financial records:

- Trade Debtors: ₦85,000\text{₦}85,000
- Bad debts to be written off: ��5,000\text{��}5,000

The business policy requires creating a 10%10\% Provision for Doubtful Debts and a 5%5\% Provision for Discount on Debtors. What is the correct amount to be recognized as the Provision for Discount on Debtors?

  1. ₦3,600\text{₦}3,600Answer
  2. B
    ₦4,000\text{₦}4,000
  3. C
    ₦4,250\text{₦}4,250
  4. D
    ₦3,825\text{₦}3,825

Answer

The provision for discount on debtors is ₦3,600\text{₦}3,600.
The provision for discount on debtors is computed on net good debtors. Subtracting bad debts (₦5,000\text{₦}5,000) gives ₦80,000\text{₦}80,000. Deducting the 10%10\% doubtful debts provision (₦8,000\text{₦}8,000) leaves ₦72,000\text{₦}72,000. Applying 5%5\% to ₦72,000\text{₦}72,000 yields ₦3,600\text{₦}3,600.

Step-by-Step Solution

1
Deduct bad debts written off from gross trade debtors to obtain net trade debtors before provisions.
₦85,000−₦5,000=₦80,000\text{₦}85,000 - \text{₦}5,000 = \text{₦}80,000
Bad debts written off represent uncollectible debts and must be removed from gross debtors prior to estimating provisions.
2
Calculate the Provision for Doubtful Debts on the adjusted trade debtors balance.
10%×₦80,000=₦8,00010\% \times \text{₦}80,000 = \text{₦}8,000
The provision for doubtful debts is calculated on the remaining recoverable debtors.
3
Deduct the provision for doubtful debts from the adjusted trade debtors balance.
₦80,000−₦8,000=₦72,000\text{₦}80,000 - \text{₦}8,000 = \text{₦}72,000
Cash discount will only be offered to prompt-paying debtors who are not expected to default.
4
Calculate the Provision for Discount on Debtors on the net estimated good debtors balance.
5%×₦72,000=₦3,6005\% \times \text{₦}72,000 = \text{₦}3,600
Provision for discount on debtors must be computed strictly after deducting doubtful debt provisions.

Key Concept

Accounting order of adjustments for trade debtors: Bad Debts Written Off → Provision for Doubtful Debts → Provision for Discount on Debtors.
Estimated Time:1m 30s
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Topics

Provision for Discounts on Debtors and Creditors

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