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Difficulty: Very hardProvision for Discounts on Debtors and Creditors

The trial balance of standard trading enterprise extracts as at 31st December 2025 showed Trade Debtors of ₦120,000\text{₦}120,000, Provision for Doubtful Debts of ₦6,000\text{₦}6,000, and Provision for Discount on Debtors of ₦1,800\text{₦}1,800.

Additional adjustments at year-end state:
1. Further bad debts of ₦5,000\text{₦}5,000 are to be written off.
2. Provision for doubtful debts is to be adjusted to 5%5\% of trade debtors.
3. Provision for discount on debtors is to be created at 2%2\% of net debtors.

What is the net amount to be charged to the Profit and Loss Account for provision for discount on debtors for the year ended 31st December 2025?

  1. ₦385Answer
  2. B
    ₦500
  3. C
    ₦600
  4. D
    ₦2,185

Answer

The net amount to be charged to the Profit and Loss Account is ₦385.
To find the correct charge to the Profit and Loss Account, unrecorded bad debts of ₦5,000 are first deducted from gross debtors of ₦120,000 to get ₦115,000. Next, the new provision for doubtful debts (5% of ₦115,000 = ₦5,750) is deducted to yield net recoverable debtors of ₦109,250. The 2% provision for discount on debtors is then calculated on ₦109,250, giving ₦2,185. Finally, subtracting the existing provision of ₦1,800 leaves an increase of ₦385 to be charged to the Profit and Loss Account.

Step-by-Step Solution

1
Calculate the adjusted trade debtors after writing off additional bad debts.
₦120,000−₦5,000=₦115,000\text{₦}120,000 - \text{₦}5,000 = \text{₦}115,000
Unrecorded bad debts must be removed from gross trade debtors first.
2
Calculate the new provision for doubtful debts at 5%.
5%×₦115,000=₦5,7505\% \times \text{₦}115,000 = \text{₦}5,750
Provision for doubtful debts is calculated on trade debtors after writing off bad debts.
3
Calculate net debtors eligible for cash discount.
\text{₦}115,000 - \text{₦}5,750 = \text{₦}109,250
Provision for discount on debtors must be computed ONLY on the net debtors expected to pay (after deducting provision for doubtful debts).
4
Compute the required new provision for discount on debtors at 2%.
2%×₦109,250=₦2,1852\% \times \text{₦}109,250 = \text{₦}2,185
This represents the total provision required in the Statement of Financial Position at year end.
5
Calculate the adjustment amount to be charged to the Profit and Loss Account.
\text{��}2,185 - \text{₦}1,800 = \text{₦}385
Only the increase over the existing provision balance of ₦1,800 is charged as an expense to the Profit and Loss Account.

Key Concept

Calculation and accounting sequence for provision for discount on debtors
Estimated Time:2m 0s
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Topics

Provision for Discounts on Debtors and Creditors

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