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Difficulty: EasyProvision for Discounts on Debtors and Creditors

Bisi Traders has Trade Debtors of ₦40,000\text{₦}40,000 and a Provision for Doubtful Debts of ₦2,000\text{₦}2,000. If the business decides to create a 5%5\% Provision for Discount on Debtors, what is the amount of the provision for discount on debtors?

  1. A
    ₦2,000\text{₦}2,000
  2. ₦1,900\text{₦}1,900Answer
  3. C
    ₦38,000\text{₦}38,000
  4. D
    ₦36,100\text{₦}36,100

Answer

₦1,900\text{₦}1,900
The provision for discount on debtors is calculated only on good debts. Good debts are determined by subtracting the provision for doubtful debts from total trade debtors (₦40,000−₦2,000=₦38,000\text{₦}40,000 - \text{₦}2,000 = \text{₦}38,000). Taking 5%5\% of ₦38,000\text{₦}38,000 yields ₦1,900\text{₦}1,900.

Step-by-Step Solution

1
Calculate net trade debtors subject to cash discount
Net Debtors = Gross Debtors - Provision for Doubtful Debts = ₦40,000−₦2,000=₦38,000\text{₦}40,000 - \text{₦}2,000 = \text{₦}38,000
Discount is only allowed to prompt-paying debtors who are expected to pay, so doubtful debts must be excluded first.
2
Apply the discount rate to net debtors
Provision for Discount on Debtors = 5%×₦38,000=₦1,9005\% \times \text{₦}38,000 = \text{₦}1,900
The provision rate is multiplied by the net estimated collectible debtors.

Key Concept

Provision for Discount on Debtors calculation
Estimated Time:45s
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Topics

Provision for Discounts on Debtors and Creditors

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