Q: A business offers a 2% prompt payment discount on all credit sales. At year end, trade receivables are £530,000, of which £190,000 are less than 10 days old. If 40% of these are from customers who usually take the discount, what is the allowance for prompt payment discounts?

$$190,000 \times 40\% \times 2\% = 1,520$$

Q: A business’s trade receivables at year end are £50,000 after writing off £5,600 of bad debts. If 3% of receivables are estimated to be doubtful and the existing allowance is £1,200, what is the increase in the allowance for doubtful debts?

$$50,000 \times 3\% = 1,500$$; Increase = $$1,500 - 1,200 = 300$$

Q: A business’s trade receivables are £44,000 after writing off £6,300 of bad debts. If 3% are estimated to be doubtful and the existing allowance is £1,500, what is the reduction in the allowance for doubtful debts?

$$44,000 \times 3\% = 1,320$$; Reduction = $$1,500 - 1,320 = 180$$

Question 1

Which of the following best describes the accounting treatment when a specific trade receivable is determined to be a bad debt?

Accepted Answer

Debit Bad Debts Expense; Credit Customer’s Account

Question 2

A business has trade receivables of £270,000 at year end. It decides to write off £13,000 as bad debts and estimates that 3% of the remaining receivables will be doubtful. What is the net figure for trade receivables to be shown in the balance sheet?

Accepted Answer

£249,290

Question 3

Which two fundamental accounting concepts justify the creation of an allowance for doubtful debts?

Accepted Answer

Prudence and Accrual Basis

Question 4

A business’s allowance for doubtful debts was £20,000 at 1 January. During the year, £70,000 of bad debts were written off. At year end, the required allowance is £23,000. What is the total expense relating to bad and doubtful debts in the income statement?

Accepted Answer

£73,000

Question 5

If a business needs to reduce its allowance for doubtful debts, which double entry is correct?

Accepted Answer

Debit Allowance for Doubtful Debts; Credit Bad Debts Expense

Question 6

A business offers a 2% prompt payment discount on all credit sales. At year end, trade receivables are £530,000, of which £190,000 are less than 10 days old. If 40% of these are from customers who usually take the discount, what is the allowance for prompt payment discounts?

Accepted Answer

$$190,000 	imes 40\% 	imes 2\% = 1,520$$

Question 7

Which of the following statements about the impact of bad debts and allowances for doubtful debts on the income statement is correct?

Accepted Answer

Bad debts written off and increases in the allowance for doubtful debts are both expenses.

Question 8

A business writes off a debt as bad in 2023, but recovers £400 of it in 2024. How should this recovery be recorded?

Accepted Answer

Debit Customer’s Account; Credit Bad Debts Recovered, then Debit Cash at Bank; Credit Customer’s Account

Question 9

A business’s allowance for doubtful debts was £10,000 at 1 January. At year end, it is adjusted to £8,000. During the year, £61,000 of bad debts were written off and £400 of previously written-off debts were recovered. What is the net total charge in the income statement?

Accepted Answer

$$61,000 - (10,000 - 8,000) - 400 = 58,600$$

Question 10

When setting up an allowance for doubtful debts for the first time, which journal entry is correct?

Accepted Answer

Debit Bad Debts Expense; Credit Allowance for Doubtful Debts

Question 11

A business’s trade receivables at year end are £50,000 after writing off £5,600 of bad debts. If 3% of receivables are estimated to be doubtful and the existing allowance is £1,200, what is the increase in the allowance for doubtful debts?

Accepted Answer

$$50,000 	imes 3\% = 1,500$$; Increase = $$1,500 - 1,200 = 300$$

Question 12

Which of the following is NOT a factor that should be considered when estimating the allowance for doubtful debts?

Accepted Answer

The business’s total sales revenue

Question 13

A business’s trade receivables are £44,000 after writing off £6,300 of bad debts. If 3% are estimated to be doubtful and the existing allowance is £1,500, what is the reduction in the allowance for doubtful debts?

Accepted Answer

$$44,000 	imes 3\% = 1,320$$; Reduction = $$1,500 - 1,320 = 180$$

Question 14

Which of the following best explains why businesses reinstate a previously written-off debt in the customer’s account before recording its recovery?

Accepted Answer

To maintain a complete history of transactions with the customer

Question 15

Under IFRS 15, how should sales revenue be reported when prompt payment discounts are offered?

Accepted Answer

Net of any prompt payment discounts taken or expected to be taken

Question 16

Which of the following is TRUE regarding the calculation of the allowance for doubtful debts?

Accepted Answer

Percentages must be applied to trade receivables after bad debts have been written off

Question 17

A business has trade receivables of £9,640. Based on an aged debtors report, the allowance for doubtful debts is calculated as £208. What is the net figure for trade receivables in the balance sheet?

Accepted Answer

£9,432

Question 18

Which of the following is the correct double entry when a prompt payment discount is taken by a customer?

Accepted Answer

Debit Cash at Bank; Debit Discounts Allowed; Credit Customer’s Account

Question 19

A business sets up an allowance for prompt payment discounts for the first time. Which journal entry is correct?

Accepted Answer

Debit Discounts Allowed; Credit Allowance for Prompt Payment Discounts

Bad Debts, Allowances for Doubtful Debts, and Allowances for Prompt Payment Discounts

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