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Difficulty: MediumProvision for Discounts on Debtors and Creditors

The ledger of Tunde & Co. shows a Trade Debtors balance of ₦120,000\text{₦}120,000 at the end of the accounting period. Additional information reveals that bad debts of ₦5,000\text{₦}5,000 are to be written off, a Provision for Doubtful Debts is to be maintained at 5%5\% on net debtors, and a Provision for Discount on Debtors is to be created at 2%2\%. What is the amount of the new Provision for Discount on Debtors to be created?

Answer: 2185 ₦

Answer

The amount of the new Provision for Discount on Debtors is ₦2,185\text{₦}2,185.
The provision for discount on debtors must be calculated on good debtors. Starting with gross debtors of ₦120,000\text{₦}120,000, subtracting bad debts of ₦5,000\text{₦}5,000 leaves ₦115,000\text{₦}115,000. Deducting the 5%5\% provision for doubtful debts (₦5,750\text{₦}5,750) gives net good debtors of ₦109,250\text{₦}109,250. Applying 2%2\% to ₦109,250\text{₦}109,250 results in ₦2,185\text{₦}2,185.

Step-by-Step Solution

1
Deduct bad debts written off from gross trade debtors
Net debtors before provision = ₦120,000−₦5,000=��115,000\text{₦}120,000 - \text{₦}5,000 = \text{��}115,000
Bad debts are irrecoverable and must be removed from trade debtors before calculating provisions.
2
Calculate the Provision for Doubtful Debts
Provision for Doubtful Debts = 5%×₦115,000=₦5,7505\% \times \text{₦}115,000 = \text{₦}5,750
Provision for doubtful debts is based on net debtors after bad debts are written off.
3
Deduct provision for doubtful debts to determine eligible good debtors
Eligible debtors balance = ₦115,000−₦5,750=₦109,250\text{₦}115,000 - \text{₦}5,750 = \text{₦}109,250
Discounts are only estimated for good debtors who are expected to pay promptly, excluding doubtful accounts.
4
Calculate the Provision for Discount on Debtors
Provision for Discount on Debtors = 2%×₦109,250=₦2,1852\% \times \text{₦}109,250 = \text{₦}2,185
Apply the discount rate to the net eligible debtors balance.

Key Concept

Calculation Sequence for Provision for Discount on Debtors
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Topics

Provision for Discounts on Debtors and Creditors

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