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Difficulty: Very hardProvision for Discounts on Debtors and Creditors

The trial balance of OLUWA & Sons Trading Enterprise as at 31st December 2025 shows Trade Debtors of ₦250,000\text{₦}250,000 and an existing Provision for Discount on Debtors of ₦3,500\text{₦}3,500. Additional information reveals that bad debts of ₦10,000\text{₦}10,000 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 to be charged to the Profit and Loss Account as provision for discount on debtors for the year?

  1. ₦1,060\text{₦}1,060Answer
  2. B
    ₦1,300\text{₦}1,300
  3. C
    ₦1,500\text{₦}1,500
  4. D
    ₦4,560\text{₦}4,560

Answer

₦1,060\text{₦}1,060
To calculate the provision for discount on debtors correctly, bad debts must first be subtracted from gross trade debtors (₦250,000−₦10,000=₦240,000\text{₦}250,000 - \text{₦}10,000 = \text{₦}240,000). Next, the provision for doubtful debts (5%5\% of ₦240,000=₦12,000\text{₦}240,000 = \text{₦}12,000) must be deducted, giving ₦228,000\text{₦}228,000. The 2%2\% provision for discount on debtors is then calculated on ₦228,000\text{₦}228,000, which equals ₦4,560\text{₦}4,560. Deducting the existing provision balance of ₦3,500\text{₦}3,500 gives an increase of ₦1,060\text{₦}1,060, which is the net amount charged to the Profit and Loss Account.

Step-by-Step Solution

1
Deduct bad debts written off from gross debtors
Net Debtors after Bad Debts = ₦250,000−₦10,000=₦240,000\text{₦}250,000 - \text{₦}10,000 = \text{₦}240,000
Bad debts identified at year-end must be written off from gross debtors before calculating any provisions.
2
Calculate and deduct provision for doubtful debts
Provision for Doubtful Debts = 5%×₦240,000=₦12,0005\% \times \text{₦}240,000 = \text{₦}12,000. Debtors subject to discount = ₦240,000−₦12,000=₦228,000\text{₦}240,000 - \text{₦}12,000 = \text{₦}228,000
Provision for discount on debtors is strictly calculated on debtors expected to pay (good debts), which is net of doubtful debts.
3
Calculate required provision for discount on debtors
New Provision for Discount on Debtors = 2%×₦228,000=₦4,5602\% \times \text{₦}228,000 = \text{₦}4,560
Apply the discount rate to the net eligible debtors balance.
4
Determine net charge to Profit and Loss Account
Profit & Loss Charge = ₦4,560−₦3,500=₦1,060\text{₦}4,560 - \text{₦}3,500 = \text{₦}1,060
Only the increase in provision is debited to the Profit and Loss Account.

Key Concept

Calculation of Provision for Discount on Debtors after accounting for Bad Debts and Provision for Doubtful Debts
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Topics

Provision for Discounts on Debtors and Creditors

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