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Difficulty: MediumProvision for Discounts on Debtors and Creditors

Consider the financial data extracted from the books of Kalu Enterprises at the end of the accounting period. Fill in the blanks with the correct numerical values.

Answer:Kalu Enterprises has Trade Debtors of ₦150,000\text{₦}150,000. The firm decides to write off bad debts of ₦10,000\text{₦}10,000 and create a 5%5\% Provision for Doubtful Debts. Thereafter, a 2%2\% Provision for Discount on Debtors is to be created.

The net debtors amount on which the provision for discount is calculated is ₦\text{₦}【133,000】, and the amount of Provision for Discount on Debtors is ₦\text{₦}【2,660】.

Answer

The net debtors amount subject to discount provision is ₦133,000, and the Provision for Discount on Debtors is ₦2,660.
To calculate the provision for discount on debtors correctly, bad debts written off (₦10,000) are subtracted from gross debtors (₦150,000) to get ₦140,000. Next, the 5% provision for doubtful debts (₦7,000) is deducted to determine the net good debtors of ₦133,000. Finally, 2% of ₦133,000 gives ₦2,660 as the provision for discount on debtors.

Step-by-Step Solution

1
Deduct bad debts written off from gross trade debtors
₦150,000−₦10,000=₦140,000\text{₦}150,000 - \text{₦}10,000 = \text{₦}140,000
Bad debts are irrecoverable and must be removed before calculating any provisions.
2
Calculate and deduct the provision for doubtful debts
Provision for doubtful debts = 5%×₦140,000=₦7,0005\% \times \text{₦}140,000 = \text{₦}7,000. Debtors remaining = ₦140,000−₦7,000=₦133,000\text{₦}140,000 - \text{₦}7,000 = \text{₦}133,000.
Discount is only allowed to customers who are expected to pay, so doubtful debts must be excluded first.
3
Calculate the provision for discount on debtors
Provision for discount on debtors = 2%×₦133,000=₦2,6602\% \times \text{₦}133,000 = \text{₦}2,660.
Apply the discount provision percentage to the net good debtors balance.

Key Concept

Calculation order for Provision for Discount on Debtors
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Topics

Provision for Discounts on Debtors and Creditors

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