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The MCQs below are drawn from the Accountancy & Auditing subject category.
Showing 4481–4490
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4481
What term describes an amount set aside from business profits to cover a potential future loss or liability?
A provision is an amount charged against profits to provide for a known liability or a decrease in the value of an asset, where the exact amount or timing is uncertain. It is a prudent accounting measure to ensure that potential losses are recognized in the period they relate to.
4482
Given trade receivables of $18,000 and a provision for doubtful debts of $900 at year-end, what is the net trade receivables figure for the balance sheet?
The net figure for trade receivables in the balance sheet is calculated by subtracting the specific provision for doubtful debts from the gross trade receivables balance. Here, $18,000 - $900 = $17,100. The bad debts written off during the year are already accounted for in the receivables balance.
4483
What is the standard accounting procedure for recording the creation of a provision for doubtful debts?
The creation of a provision for doubtful debts is treated as an estimated expense for the period. Therefore, the Profit and Loss Account is debited to reflect this expense. Simultaneously, the provision is deducted from the total Sundry Debtors in the Balance Sheet to present the net realizable value of the accounts receivable, adhering to the principle of prudence.
4484
If a business creates a 4% provision for doubtful debts amounting to $160, what is the total value of the outstanding debts?
To find the total outstanding debts, divide the provision amount by the percentage rate. Calculation: $160 / 0.04 = $4,000. Therefore, the total outstanding debt balance upon which the provision is calculated is $4,000.
4485
When a business establishes a provision for doubtful debts, which ledger entry is required to record this adjustment?
A provision for doubtful debts is a contra-asset account. To increase this provision, the account must be credited, while the corresponding debit is made to the Profit and Loss account as an expense. This adjustment reflects the prudent accounting principle of anticipating potential losses from uncollectible receivables, ensuring that the net value of trade receivables reported on the balance sheet is more accurate.
4486
To which account is the provision for doubtful debts typically debited during the end-of-period adjustments?
The creation or adjustment of a provision for doubtful debts is an expense to the business. Therefore, the corresponding debit entry is made to the Profit and Loss account to reflect the estimated loss from uncollectible accounts. The credit entry is made to the Provision for Doubtful Debts account, which acts as a contra-asset account against the total trade receivables.
4487
A business has trade receivables of $16,000 and an existing Provision for Doubtful Debts of $640. If the policy is to maintain the provision at 5% of trade receivables, what is the required adjustment in the Income Statement?
The new provision required is 5% of $16,000, which equals $800. The existing provision is $640. Therefore, an additional provision of $160 ($800 - $640) must be created. This increase in the provision is treated as an expense in the Income Statement, resulting in a $160 debit entry.
4488
What is the typical balance type for a Provision for Bad Debts account?
A Provision for Bad Debts (or Allowance for Doubtful Accounts) is a contra-asset account. Since it reduces the value of the total accounts receivable, it carries a credit balance, which is the opposite of the normal debit balance associated with asset accounts.
4489
Calculate the amount to be debited to the Profit and Loss account given an opening provision for doubtful debts of $3,222, a closing provision of $5,222, and bad debts written off of $500.
The amount to be charged to the Profit and Loss account is calculated as the increase in the provision plus the actual bad debts written off. The increase in provision is $5,222 - $3,222 = $2,000. Adding the $500 of bad debts written off results in a total charge of $2,500. This ensures that the provision reflects the estimated risk while accounting for realized losses during the period.
4490
Given that the opening and closing balances of the provision for doubtful debts account are $1,000 and $2,000 respectively, and bad debts total $200, how should the provision be treated in the balance sheet?
In financial reporting, the provision for doubtful debts is a contra-asset account. To determine the net realizable value of accounts receivable, the current closing balance of the provision must be subtracted from the total gross debtors balance reported on the balance sheet.
