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Difficulty: MediumProvision for Discounts on Debtors and Creditors

Zainab Retail Outlets extracted a Trade Debtors balance of ₦100,000\text{₦}100,000 at the end of the financial year. The business policy requires writing off bad debts of ₦10,000\text{₦}10,000, maintaining a provision for doubtful debts at 5%5\% on net debtors, and creating a 2%2\% provision for discount on debtors. What is the amount of the provision for discount on debtors to be recognized?

  1. A
    ₦1,800\text{₦}1,800
  2. ₦1,710\text{₦}1,710Answer
  3. C
    ₦2,000\text{₦}2,000
  4. D
    ₦1,700\text{₦}1,700

Answer

₦1,710\text{₦}1,710
To calculate the provision for discount on debtors, accounting principles require a strict sequence: first subtract bad debts written off from gross debtors (₦100,000−₦10,000=₦90,000\text{₦}100,000 - \text{₦}10,000 = \text{₦}90,000), then calculate and subtract the provision for doubtful debts (5%×₦90,000=₦4,5005\% \times \text{₦}90,000 = \text{₦}4,500), leaving ₦85,500\text{₦}85,500. Applying the 2%2\% discount rate to ₦85,500\text{₦}85,500 gives ₦1,710\text{₦}1,710.

Step-by-Step Solution

1
Deduct bad debts written off from gross trade debtors
₦100,000−₦10,000=₦90,000\text{₦}100,000 - \text{₦}10,000 = \text{₦}90,000
Bad debts must be written off first to arrive at net recoverable debtors.
2
Calculate and deduct provision for doubtful debts on remaining debtors
Provision for doubtful debts = 5%×₦90,000=₦4,5005\% \times \text{₦}90,000 = \text{₦}4,500. Net debtors eligible for discount = ₦90,000−₦4,500=₦85,500\text{₦}90,000 - \text{₦}4,500 = \text{₦}85,500
Discount is offered only to debtors expected to pay, so doubtful debts must be excluded prior to computing discount provision.
3
Calculate provision for discount on debtors
Provision for discount on debtors = 2%×₦85,500=₦1,7102\% \times \text{₦}85,500 = \text{₦}1,710
The 2%2\% rate is applied to the net expected collectible debtors.

Key Concept

Accounting Order of Adjustments for Debtors
Estimated Time:1m 30s
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Topics

Provision for Discounts on Debtors and Creditors

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