CIE Accounting Paper-2: Specimen Questions with Answers 58 - 60 of 103

Passage

Fancy dresses show the following information as on 31.12. 2012.

Debtors- £164000, Bad debts during the year 2012 amounts to £4000, Bad debts for the year 2013 amounts to £2000. Provision for bad and doubtful debts in 2012 is £5000 and for the year 2013 is@5%. Discount allowed in 2012 is £2000 and for the year 2013 a provision for discount on debtors is created@2%.

Question number: 58 (1 of 5 Based on Passage) Show Passage

Essay Question▾

Describe in Detail

What is the need for Fancy dresses to create a provision for bad and doubtful debts for the next accounting year in the current year itself?

Explanation

In the accounting system, the convention of conservatism is followed. According to this system, the business should foresee its loss in the future and make provisions for it, but however the future profits should not be accounted for. Similarly Fancy dresses as per the convention of conservatism provides for its doubtful debts for the next accounting year in the current year itself. Doubtful debts refer to those debts whose payments may or may not be received. As the goods are sold in the current year it is essential to make the provision also in the current year itself.

Question number: 59 (2 of 5 Based on Passage) Show Passage

Essay Question▾

Describe in Detail

How will the bad debts and the provision for bad and doubtful debts be treated in the balance sheet of Fancy dresses as on 31.12. 2012

Explanation

Balance sheet of Fancy dresses as on 31.12. 2012

Shows table of Balance sheet of Fancy dresses as on 31.12. 2012

LIABILITIES

AMOUNT

AMOUNT

ASSETS

AMOUNT

AMOUNT

Sundry debtors

164000

Less: Bad debts

2000

162000

Less: Provision for bad & doubtful debts@5%

8100

153900

Less: Provision for discount on debtors@2%

3078

150822

Question number: 60 (3 of 5 Based on Passage) Show Passage

Essay Question▾

Describe in Detail

Why do Fancy dresses create a provision for discount on debtors for the next accounting year?

Explanation

As per the convention of conservatism Fancy dresses makes provision for bad and doubtful debts. But all these debts are not going to be bad debts. Some of these may turn to be good debts, and their payments may be received before the due dates. Hence for such debtors discount is to be given. Hence it is essential for fancy dresses to create a provision for such discounts in the current year itself.