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Difficulty: MediumProvision for Discounts on Debtors and Creditors

In the books of Chidiebere Enterprise, Trade Debtors stand at ₦200,000\text{₦}200,000 at the end of the financial year. Additional information reveals that bad debts of ₦20,000\text{₦}20,000 are to be written off, a provision for doubtful debts is to be created at 5%5\%, and a 2%2\% provision for discount on debtors is to be provided for. Calculate the required figures to complete the financial statement extract.

Answer:The net debtors balance after deducting bad debts and provision for doubtful debts is ₦\text{₦}【171,000】, and the provision for discount on debtors to be debited to the Profit and Loss Account is ₦\text{₦}【3,420】.

Answer

The net debtors balance after provision for doubtful debts is 171,000, and the provision for discount on debtors is 3,420.
First, bad debts of ₦20,000 are subtracted from gross debtors of ₦200,000 to get ₦180,000. Next, 5% provision for doubtful debts (₦9,000) is deducted from ₦180,000 to give ₦171,000. Finally, 2% provision for discount on debtors is calculated on ₦171,000 to yield ₦3,420.

Step-by-Step Solution

1
Deduct bad debts written off from the gross trade debtors balance.
Adjusted debtors balance = ₦200,000−₦20,000=₦180,000\text{₦}200,000 - \text{₦}20,000 = \text{₦}180,000.
Bad debts are irrecoverable and must be removed from debtors before calculating any provision.
2
Calculate the provision for doubtful debts at 5%5\% on adjusted debtors.
Provision for doubtful debts = 5%×₦180,000=₦9,0005\% \times \text{₦}180,000 = \text{₦}9,000.
The doubtful debts provision percentage applies to debtors expected to remain after write-offs.
3
Deduct the provision for doubtful debts to determine debtors expected to pay prompt cash.
Net debtors eligible for discount = ₦180,000−₦9,000=₦171,000\text{₦}180,000 - \text{₦}9,000 = \text{₦}171,000.
Discounts are only allowed to debtors expected to settle their accounts, excluding potential defaults.
4
Calculate the provision for discount on debtors at 2%2\% on net debtors.
Provision for discount on debtors = 2%×₦171,000=₦3,4202\% \times \text{₦}171,000 = \text{₦}3,420.
The discount provision is computed on the net valuation of debtors after deducting both bad debts and doubtful debts provision.

Key Concept

Sequential Calculation Order for Debtors Adjustments (Bad Debts → Provision for Doubtful Debts → Provision for Discount on Debtors)
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Topics

Provision for Discounts on Debtors and Creditors

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