IGCSE Accounting Paper-2: Specimen Questions with Answers 61 - 62 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: 61 (4 of 5 Based on Passage) Show Passage

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Essay Question▾

Describe in Detail

Show the treatment of the above entries in the profit and loss account of Fancy dresses for the year ending 31.12. 2012

Explanation

Profit and loss account in the books of Fancy dresses for the year ended 31.12. 2012

shows given table in Profit and loss account in the books of Fancy dresses for the year ended 31.12. 2012

PARTICUALRS

AMOUNT

AMOUNT

PARTICUALRS

AMOUNT

AMOUNT

To Bad debts

4000

Add: New bad debts

2000

6000

Add: New Provision on bad debts@5%

8100

14100

Less: Old provision on bad and doubtful debts

5000

9100

To discount allowed

2000

To provision for discount on debtors

3078

SOLUTION:

New provision@5%= Debtors – new bad debts

= 164000 – 2000

=162000 * 5%

=8100

Provision for discount on debtors

= 162000 – 8100

= 153900 * 2%

= 3078

Question number: 62 (5 of 5 Based on Passage) Show Passage

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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.