PRC-1 · Chapter 5

Bad and Doubtful Debts MCQs with Answers

100 multiple-choice questions on Bad and Doubtful Debts for PRC-1 Fundamentals of Accounting. Try each one before revealing the answer and explanation.

1. Question 1

   Which fundamental accounting concept requires a business to create an allowance for doubtful debts even before an actual loss has occurred?

   • A) Matching concept
   • B) Substance over form
   • C) Prudence concept
   • D) Going concern
   Show answer & explanation

   Answer: C) Prudence concept

   The prudence concept dictates that assets should not be overstated. By creating an allowance for doubtful debts, a business anticipates probable future losses and ensures its receivables are reported at a realistic, realizable value.

2. Question 2

   What is the specific nature of the 'Allowance for Doubtful Debts' account in the general ledger?

   • A) It is a liability account.
   • B) It is a current asset account.
   • C) It is a contra-asset account.
   • D) It is an expense account.
   Show answer & explanation

   Answer: C) It is a contra-asset account.

   The allowance for doubtful debts inherently carries a credit balance and is deducted from the gross Trade Receivables (an asset) in the statement of financial position, making it a contra-asset account.

3. Question 3

   Which of the following scenarios best describes a situation where an account should be classified as a 'Bad Debt' rather than a 'Doubtful Debt'?

   • A) A customer is late on their payment by 45 days.
   • B) A customer is experiencing temporary cash flow difficulties.
   • C) A customer has requested an extension on their credit period.
   • D) A customer has been officially declared bankrupt and the liquidator confirms no funds are available.
   Show answer & explanation

   Answer: D) A customer has been officially declared bankrupt and the liquidator confirms no funds are available.

   A debt becomes 'bad' (irrecoverable) when there is certain confirmation that the amount will not be paid, such as official bankruptcy with zero payout. Delays and financial difficulties indicate 'doubtful' debts.

4. Question 4

   What is the correct double-entry journal record to write off a confirmed irrecoverable (bad) debt?

   • A) Debit Trade Receivables, Credit Bad Debt Expense
   • B) Debit Bad Debt Expense, Credit Trade Receivables
   • C) Debit Allowance for Doubtful Debts, Credit Bad Debt Expense
   • D) Debit Bad Debt Expense, Credit Sales Revenue
   Show answer & explanation

   Answer: B) Debit Bad Debt Expense, Credit Trade Receivables

   Writing off a bad debt requires recognizing the loss (Debit Bad Debt Expense) and permanently removing the uncollectible amount from the customer's account (Credit Trade Receivables).

5. Question 5

   Which of the following statements regarding 'Good Debts' and 'Doubtful Debts' is completely correct?

   • A) Good debts must have a specific allowance created for them just in case.
   • B) Doubtful debts must be written off completely from the ledger immediately.
   • C) Good debts do not require any special accounting treatment or allowance, unlike bad and doubtful debts.
   • D) Doubtful debts are excluded from the gross receivables balance.
   Show answer & explanation

   Answer: C) Good debts do not require any special accounting treatment or allowance, unlike bad and doubtful debts.

   Good debts are those that the business fully expects to collect without difficulty. They remain in the receivables balance and do not require any specific allowance or write-off.

6. Question 6

   What is the correct journal entry to record a year-end INCREASE in the general allowance for doubtful debts?

   • A) Debit Allowance for Doubtful Debts, Credit Bad Debt Expense
   • B) Debit Bad Debt Expense, Credit Trade Receivables
   • C) Debit Trade Receivables, Credit Allowance for Doubtful Debts
   • D) Debit Bad Debt Expense, Credit Allowance for Doubtful Debts
   Show answer & explanation

   Answer: D) Debit Bad Debt Expense, Credit Allowance for Doubtful Debts

   Increasing the allowance requires recognizing a further estimated loss for the period (Debit Bad Debt Expense) and increasing the contra-asset balance (Credit Allowance for Doubtful Debts).

7. Question 7

   If an entity determines that its required closing allowance for doubtful debts is lower than its opening balance, what is the journal entry to record this DECREASE?

   • A) Debit Allowance for Doubtful Debts, Credit Bad Debt Expense
   • B) Debit Bad Debt Expense, Credit Allowance for Doubtful Debts
   • C) Debit Cash, Credit Allowance for Doubtful Debts
   • D) Debit Allowance for Doubtful Debts, Credit Trade Receivables
   Show answer & explanation

   Answer: A) Debit Allowance for Doubtful Debts, Credit Bad Debt Expense

   A decrease in the required allowance means the previous estimate was too pessimistic. The entry reduces the allowance (Debit) and credits the Bad Debt Expense account, effectively increasing net profit for the year.

8. Question 8

   An irrecoverable debt of Rs. 5,000, which was formally written off two years ago, is unexpectedly paid by the customer via cheque. What is the correct double-entry to record this recovery?

   • A) Debit Cash/Bank Rs. 5,000, Credit Trade Receivables Rs. 5,000
   • B) Debit Cash/Bank Rs. 5,000, Credit Bad Debts Expense (or Recovered) Rs. 5,000
   • C) Debit Trade Receivables Rs. 5,000, Credit Cash/Bank Rs. 5,000
   • D) Debit Cash/Bank Rs. 5,000, Credit Allowance for Doubtful Debts Rs. 5,000
   Show answer & explanation

   Answer: B) Debit Cash/Bank Rs. 5,000, Credit Bad Debts Expense (or Recovered) Rs. 5,000

   Because the customer's account was previously wiped to zero, the receipt of cash increases the bank balance (Debit Bank) and is recognized as income or a reduction of current expense (Credit Bad Debts Recovered/Expense).

9. Question 9

   When preparing an aging analysis of accounts receivable, which category of customers statistically carries the highest probability of defaulting on their debt?

   • A) Current month receivables (0-30 days)
   • B) Receivables aged 31 to 60 days
   • C) Receivables aged 61 to 90 days
   • D) Receivables aged over 90 days past due
   Show answer & explanation

   Answer: D) Receivables aged over 90 days past due

   Aging analysis operates on the principle that the older a debt becomes, the less likely it is to be collected. Therefore, debts outstanding for the longest period (over 90 days) carry the highest risk of default.

10. Question 10

    At the end of the financial year, the 'Bad and Doubtful Debts Expense' account is formally closed by transferring its final balance to which financial statement?

    • A) The Statement of Financial Position
    • B) The Statement of Changes in Equity
    • C) The Statement of Profit or Loss (Statement of Comprehensive Income)
    • D) The Allowance for Doubtful Debts account
    Show answer & explanation

    Answer: C) The Statement of Profit or Loss (Statement of Comprehensive Income)

    The Bad and Doubtful Debts Expense account is a nominal ledger account representing an operating cost. Like all expenses, it is closed out at year-end to the Statement of Profit or Loss.

11. Question 11

    What is the specific computational difference between a 'Specific Allowance' and a 'General Allowance' for doubtful debts?

    • A) Specific allowances are calculated as a percentage of total sales, while general allowances are calculated on total assets.
    • B) Specific allowances are applied to the entire receivables ledger, while general allowances are only for bankrupt customers.
    • C) Specific allowances are created for individual, identifiable customers facing known difficulties, whereas general allowances apply a percentage risk to the remaining normal pool of receivables.
    • D) There is no difference; the terms are perfectly synonymous.
    Show answer & explanation

    Answer: C) Specific allowances are created for individual, identifiable customers facing known difficulties, whereas general allowances apply a percentage risk to the remaining normal pool of receivables.

    Specific allowances target identified risky accounts (e.g., a customer in a dispute). A general allowance is a blanket percentage applied to the remaining 'good' receivables based on historical default rates.

12. Question 12

    When calculating a General Allowance percentage (e.g., 5%) at year-end, which of the following amounts MUST first be deducted from the gross Trade Receivables balance before applying the percentage?

    • A) Only the opening allowance balance.
    • B) Only specific allowances created for individual customers.
    • C) Any bad debts to be written off, plus the balances of any customers requiring a specific allowance.
    • D) The total cash sales made during the year.
    Show answer & explanation

    Answer: C) Any bad debts to be written off, plus the balances of any customers requiring a specific allowance.

    To calculate the general allowance, the base figure must be the 'healthy' pool of receivables. Therefore, bad debts written off and balances already covered by specific allowances must be excluded from the gross figure before applying the general percentage.

13. Question 13

    'Delta Corp' has a gross Trade Receivables balance of Rs. 100,000. The opening allowance for doubtful debts was Rs. 5,000. At year-end, the company decides to maintain the allowance at 5% of gross receivables. What is the charge to the Statement of Profit or Loss?

    • A) Rs. 5,000
    • B) Rs. 0
    • C) Rs. 10,000
    • D) Rs. 4,000
    Show answer & explanation

    Answer: B) Rs. 0

    The required closing allowance is 5% of 100,000 = Rs. 5,000. Since the opening allowance is already Rs. 5,000, no increase or decrease is necessary. Thus, the charge to the Statement of Profit or Loss is Rs. 0.

14. Question 14

    'Omega Traders' has a gross Receivables balance of Rs. 200,000. The opening allowance was Rs. 6,000. At year-end, 'Omega' determines the allowance should be 4% of receivables. What is the impact on the Statement of Profit or Loss?

    • A) An expense of Rs. 8,000
    • B) An expense of Rs. 2,000
    • C) A reduction in expense (or income) of Rs. 2,000
    • D) A reduction in expense (or income) of Rs. 8,000
    Show answer & explanation

    Answer: B) An expense of Rs. 2,000

    The required closing allowance is 4% of 200,000 = Rs. 8,000. The opening balance is Rs. 6,000. The allowance must be increased by Rs. 2,000 (8,000 - 6,000), resulting in an expense charge of Rs. 2,000.

15. Question 15

    'Sigma Retail' has an opening allowance for doubtful debts of Rs. 15,000. The required closing allowance is calculated to be Rs. 10,000. Which journal entry correctly processes this adjustment?

    • A) Debit Bad Debt Expense Rs. 5,000, Credit Allowance for Doubtful Debts Rs. 5,000
    • B) Debit Allowance for Doubtful Debts Rs. 10,000, Credit Bad Debt Expense Rs. 10,000
    • C) Debit Allowance for Doubtful Debts Rs. 5,000, Credit Bad Debt Expense Rs. 5,000
    • D) Debit Trade Receivables Rs. 5,000, Credit Allowance for Doubtful Debts Rs. 5,000
    Show answer & explanation

    Answer: C) Debit Allowance for Doubtful Debts Rs. 5,000, Credit Bad Debt Expense Rs. 5,000

    The allowance must decrease from 15,000 to 10,000. A decrease of Rs. 5,000 requires debiting the Allowance account and crediting the Bad Debt Expense account, which increases net profit.

16. Question 16

    At year-end, 'Prime Distributors' has a Receivables balance of Rs. 150,000. A debt of Rs. 10,000 needs to be written off as bad. 'Prime' then wishes to create a 5% general allowance on the remaining balance. What is the value of the closing allowance for doubtful debts?

    • A) Rs. 7,500
    • B) Rs. 7,000
    • C) Rs. 10,000
    • D) Rs. 17,000
    Show answer & explanation

    Answer: B) Rs. 7,000

    First, deduct the bad debt: 150,000 - 10,000 = Rs. 140,000. Next, apply the 5% general rate to the remaining balance: 140,000 x 5% = Rs. 7,000. This is the required closing allowance.

17. Question 17

    Following the previous scenario (Receivables: 150k, Bad debt write-off: 10k, Closing allowance required: 7k). If the opening allowance was Rs. 8,000, what is the TOTAL charge to the Statement of Profit or Loss for bad and doubtful debts?

    • A) Rs. 10,000
    • B) Rs. 9,000
    • C) Rs. 11,000
    • D) Rs. 1,000
    Show answer & explanation

    Answer: B) Rs. 9,000

    The bad debt expense is Rs. 10,000. The allowance is decreasing from 8,000 to 7,000, creating an income/reduction in expense of Rs. 1,000. The net charge to Profit or Loss is 10,000 - 1,000 = Rs. 9,000.

18. Question 18

    How is the Trade Receivables balance presented in the Statement of Financial Position at year-end?

    • A) As Gross Receivables plus the Allowance for Doubtful Debts.
    • B) As Net Receivables (Gross Receivables minus Bad Debts Written Off, with no deduction for the allowance).
    • C) As Gross Receivables under Non-Current Assets.
    • D) As Net Trade Receivables (Gross Receivables minus the Allowance for Doubtful Debts) under Current Assets.
    Show answer & explanation

    Answer: D) As Net Trade Receivables (Gross Receivables minus the Allowance for Doubtful Debts) under Current Assets.

    In the Statement of Financial Position, the allowance for doubtful debts is deducted from the gross receivables figure, and the net expected realizable value is reported under Current Assets.

19. Question 19

    An entity has an opening allowance of Rs. 38,000. At year-end, gross receivables are Rs. 868,500. The entity writes off Rs. 28,500 as irrecoverable and decides to maintain a 5% general allowance. What is the INCREASE in the allowance account?

    • A) Rs. 4,000
    • B) Rs. 42,000
    • C) Rs. 32,500
    • D) Rs. 28,500
    Show answer & explanation

    Answer: A) Rs. 4,000

    Remaining receivables after write-off: 868,500 - 28,500 = 840,000. Closing allowance required = 5% x 840,000 = Rs. 42,000. The increase is the closing allowance (42,000) minus the opening allowance (38,000) = Rs. 4,000.

20. Question 20

    Using the data from the previous question (Bad debt: 28,500, Allowance Increase: 4,000), what is the total expense charged to the Statement of Profit or Loss for the year?

    • A) Rs. 28,500
    • B) Rs. 42,000
    • C) Rs. 32,500
    • D) Rs. 4,000
    Show answer & explanation

    Answer: C) Rs. 32,500

    The total charge consists of the actual bad debts written off (Rs. 28,500) plus the increase required in the allowance account (Rs. 4,000). Total expense = 28,500 + 4,000 = Rs. 32,500.

21. Question 21

    A bookkeeper accidentally writes off a bad debt of Rs. 1,000 by debiting 'Bad Debt Expense' and crediting 'Accounts Payable'. What is the direct impact of this error on the financial statements?

    • A) Profit is overstated, and liabilities are understated.
    • B) Profit is understated, and assets are understated.
    • C) Profit is unaffected, but liabilities are overstated and assets are overstated.
    • D) Profit is overstated, and assets are overstated.
    Show answer & explanation

    Answer: C) Profit is unaffected, but liabilities are overstated and assets are overstated.

    The expense is correctly recorded (profit is correct), but crediting Payables instead of Receivables artificially increases liabilities and fails to reduce assets. Therefore, both liabilities and assets are overstated by Rs. 1,000.

22. Question 22

    The allowance for receivables at 31 October 2011 was Rs. 9,000. During the year, bad debts of Rs. 5,000 were written off. At 31 October 2012, receivables were Rs. 120,000, and a 5% allowance is required. What is the total charge to the Statement of Profit or Loss for 2012?

    • A) Rs. 2,000
    • B) Rs. 5,000
    • C) Rs. 8,000
    • D) Rs. 11,000
    Show answer & explanation

    Answer: A) Rs. 2,000

    Required allowance = 5% x 120,000 = 6,000. Opening allowance = 9,000. Decrease in allowance = 3,000 (credit to expense). Bad debt written off = 5,000 (debit to expense). Net charge = 5,000 - 3,000 = Rs. 2,000.

23. Question 23

    If an entity has an opening allowance of Rs. 12,500 and a required closing allowance of Rs. 28,500, what is the net effect of this adjustment on the net profit?

    • A) Net profit will increase by Rs. 16,000.
    • B) Net profit will decrease by Rs. 16,000.
    • C) Net profit will decrease by Rs. 28,500.
    • D) Net profit will increase by Rs. 12,500.
    Show answer & explanation

    Answer: B) Net profit will decrease by Rs. 16,000.

    The allowance must be increased by Rs. 16,000 (28,500 - 12,500). This increase is recorded as an additional Bad Debt Expense, which consequently reduces the net profit by Rs. 16,000.

24. Question 24

    A business has a turnover (sales) of Rs. 2,000,000. Its accounts receivable equal 5% of turnover. The business wishes to create an allowance of 4% of receivables. What is the value of the closing allowance?

    • A) Rs. 100,000
    • B) Rs. 80,000
    • C) Rs. 4,000
    • D) Rs. 5,000
    Show answer & explanation

    Answer: C) Rs. 4,000

    Receivables = 5% of 2,000,000 = Rs. 100,000. The allowance is 4% of receivables = 4% of 100,000 = Rs. 4,000.

25. Question 25

    Following the previous scenario (Required allowance = Rs. 4,000). If this required allowance is stated to be 'one-third higher than the current (opening) allowance', what was the opening allowance?

    • A) Rs. 1,333
    • B) Rs. 3,000
    • C) Rs. 2,667
    • D) Rs. 4,000
    Show answer & explanation

    Answer: B) Rs. 3,000

    If 4,000 is 1/3 higher than the opening allowance (X), then 4,000 = X + (1/3)X = (4/3)X. Therefore, X = 4,000 * 3 / 4 = Rs. 3,000.

26. Question 26

    Still following the previous scenario (Opening = 3,000, Closing = 4,000). How will the profit for the period be affected by this specific change in the allowance?

    • A) Profit will be reduced by Rs. 1,000.
    • B) Profit will be increased by Rs. 1,000.
    • C) Profit will be reduced by Rs. 4,000.
    • D) Profit will be increased by Rs. 3,000.
    Show answer & explanation

    Answer: A) Profit will be reduced by Rs. 1,000.

    The allowance increases from 3,000 to 4,000. This Rs. 1,000 increase is charged as an expense, which reduces the net profit by Rs. 1,000.

27. Question 27

    Which of the following situations strongly necessitates the creation of a 'Specific Allowance' rather than relying solely on a 'General Allowance'?

    • A) A customer pays their invoice 5 days past the due date.
    • B) A customer is currently disputing the quality of a major shipment and refuses to pay the related invoice.
    • C) The general economy is experiencing a mild downturn.
    • D) A customer routinely takes advantage of early settlement discounts.
    Show answer & explanation

    Answer: B) A customer is currently disputing the quality of a major shipment and refuses to pay the related invoice.

    A specific allowance is created when an individual customer has a known issue indicating a high probability of non-payment, such as an ongoing dispute over an invoice.

28. Question 28

    'Zephyr Trading' maintains a Receivables ledger. Customer 'Ali' owes Rs. 15,000, but has absconded, and the debt is formally written off. Six months later, Ali reappears and pays Rs. 15,000 cash. Does this payment re-open his receivables ledger balance?

    • A) Yes, the original write-off must be fully reversed before accepting the cash.
    • B) No, the cash is simply debited to Bank and credited directly to Bad Debts Recovered/Expense.
    • C) Yes, but only in a memorandum account.
    • D) No, the cash must be credited to the Allowance for Doubtful Debts.
    Show answer & explanation

    Answer: B) No, the cash is simply debited to Bank and credited directly to Bad Debts Recovered/Expense.

    Once a debt is written off, the customer's account is zero. A subsequent unexpected recovery skips the receivables ledger entirely and is credited directly to profit/loss as Bad Debts Recovered (or credited against Bad Debt Expense).

29. Question 29

    An entity decides to write off a debt of Rs. 8,500. Before this, its gross receivables were Rs. 330,000 and it required a specific allowance of Rs. 15,000 for another customer. What is the base amount upon which a 5% general allowance will be calculated?

    • A) Rs. 330,000
    • B) Rs. 321,500
    • C) Rs. 306,500
    • D) Rs. 315,000
    Show answer & explanation

    Answer: C) Rs. 306,500

    The general allowance is calculated on the remaining 'good' receivables pool. Base = Gross (330,000) - Bad debt written off (8,500) - Specific allowance customer balance (15,000) = Rs. 306,500.

30. Question 30

    Following the previous scenario (Base for general allowance = 306,500; Specific allowance = 15,000). At 5%, what is the TOTAL closing allowance for doubtful debts?

    • A) Rs. 15,325
    • B) Rs. 15,000
    • C) Rs. 30,325
    • D) Rs. 31,500
    Show answer & explanation

    Answer: C) Rs. 30,325

    The general allowance is 5% of 306,500 = Rs. 15,325. The total closing allowance is the sum of the specific allowance and the general allowance: 15,000 + 15,325 = Rs. 30,325.

31. Question 31

    An accountant completely forgot to record a bad debt write-off of Rs. 5,000 before preparing the final accounts. The business does not use an allowance account. What is the impact on the Net Profit?

    • A) Net profit is understated by Rs. 5,000.
    • B) Net profit is overstated by Rs. 5,000.
    • C) Net profit is unaffected.
    • D) Net profit is overstated by Rs. 10,000.
    Show answer & explanation

    Answer: B) Net profit is overstated by Rs. 5,000.

    Failing to write off a bad debt means the expense was not recorded. Lower recorded expenses artificially inflate (overstate) the net profit by Rs. 5,000.

32. Question 32

    A business has opening receivables of Rs. 185,000, credit sales of Rs. 645,000, bad debts written off of Rs. 8,000, sales returns of Rs. 17,800, and cash received of Rs. 620,800. What is the closing gross Receivables balance?

    • A) Rs. 183,400
    • B) Rs. 200,000
    • C) Rs. 191,400
    • D) Rs. 175,400
    Show answer & explanation

    Answer: A) Rs. 183,400

    Closing Receivables = Opening (185,000) + Sales (645,000) - Bad debts (8,000) - Returns (17,800) - Cash (620,800) = Rs. 183,400.

33. Question 33

    Which of the following statements accurately justifies the maintenance of an 'Allowance for Doubtful Debts'?

    • A) It is legally required by tax authorities to reduce taxable income.
    • B) It guarantees that all customers will eventually pay their debts.
    • C) It ensures that accounts receivable are not overstated on the balance sheet, conforming to the prudence and matching concepts.
    • D) It provides a secret cash reserve for the business owner.
    Show answer & explanation

    Answer: C) It ensures that accounts receivable are not overstated on the balance sheet, conforming to the prudence and matching concepts.

    The allowance matches anticipated bad debt losses against the sales revenue of the same period and prevents assets (receivables) from being overstated, satisfying both matching and prudence.

34. Question 34

    If an entity has an allowance for doubtful debts of Rs. 10,000, and then a specific customer with a balance of Rs. 2,000 goes bankrupt, how does the WRITE-OFF of this Rs. 2,000 debt fundamentally alter the 'Allowance' account balance in the PRC-1 standard approach?

    • A) It immediately debits and reduces the allowance to Rs. 8,000.
    • B) It immediately credits and increases the allowance to Rs. 12,000.
    • C) It does not directly touch the allowance account; it is debited to Bad Debt Expense and the allowance is adjusted separately at year-end.
    • D) It transfers the allowance entirely to cash.
    Show answer & explanation

    Answer: C) It does not directly touch the allowance account; it is debited to Bad Debt Expense and the allowance is adjusted separately at year-end.

    In standard PRC-1 methodology, actual bad debt write-offs are debited to Bad Debt Expense. The Allowance account remains static during the year and is only re-evaluated and adjusted at year-end based on closing receivables.

35. Question 35

    At year-end, gross receivables are Rs. 540,000. A specific debt of Rs. 48,000 is to be written off. A 6% general allowance is to be maintained. The opening allowance was Rs. 25,000. What is the INCREASE in the allowance?

    • A) Rs. 4,520
    • B) Rs. 7,400
    • C) Rs. 29,520
    • D) Rs. 0
    Show answer & explanation

    Answer: A) Rs. 4,520

    Receivables = 540,000 - 48,000 = 492,000. Closing allowance = 6% x 492,000 = Rs. 29,520. The opening allowance was 25,000. Increase = 29,520 - 25,000 = Rs. 4,520.

36. Question 36

    A business has a 'Bad and Doubtful Debts Expense' ledger account. During the year, Rs. 5,000 of bad debts were debited to it. At year-end, the allowance for doubtful debts was decreased by Rs. 2,000 (credited to this expense account). What is the final transfer to Profit or Loss?

    • A) Debit Profit or Loss Rs. 7,000
    • B) Debit Profit or Loss Rs. 3,000
    • C) Credit Profit or Loss Rs. 3,000
    • D) Credit Profit or Loss Rs. 7,000
    Show answer & explanation

    Answer: B) Debit Profit or Loss Rs. 3,000

    The expense account has a debit of 5,000 and a credit of 2,000, leaving a net debit balance of 3,000. This net expense is transferred by debiting Profit or Loss and crediting the expense account.

37. Question 37

    An aged receivables analysis groups customers by the time their invoice has been outstanding. Which of the following intervals generally attracts the highest percentage allowance?

    • A) Less than 30 days
    • B) 31 - 60 days
    • C) 61 - 90 days
    • D) Over 120 days
    Show answer & explanation

    Answer: D) Over 120 days

    The longer a debt remains unpaid, the higher the statistical chance of it becoming irrecoverable. Therefore, the oldest age bracket (e.g., over 120 days) receives the highest percentage allowance.

38. Question 38

    When a company formally writes off a bad debt, how does this singular action affect the 'Net Trade Receivables' presented in the Statement of Financial Position (assuming the allowance percentage stays identical)?

    • A) It increases Net Trade Receivables.
    • B) It decreases Net Trade Receivables by the gross amount of the write-off.
    • C) It has no effect on Net Trade Receivables.
    • D) It converts the receivable into a non-current asset.
    Show answer & explanation

    Answer: B) It decreases Net Trade Receivables by the gross amount of the write-off.

    Writing off a debt physically removes that asset from the gross receivables balance. Consequently, the final Net Trade Receivables figure presented will be lower.

39. Question 39

    If an entity receives Rs. 3,000 for a bad debt written off in a prior year, and simultaneously needs to increase its general allowance by Rs. 1,000, what is the net impact on the Statement of Profit or Loss?

    • A) Net expense of Rs. 4,000
    • B) Net income of Rs. 2,000
    • C) Net income of Rs. 3,000
    • D) Net expense of Rs. 2,000
    Show answer & explanation

    Answer: B) Net income of Rs. 2,000

    The recovery generates an income (or expense reduction) of Rs. 3,000. The allowance increase generates an expense of Rs. 1,000. Net impact: 3,000 (income) - 1,000 (expense) = Rs. 2,000 net income.

40. Question 40

    A company has Gross Receivables of Rs. 50,000. It determines that customer 'X' (who owes Rs. 5,000) is doubtful, so it creates a specific allowance of 50%. A general allowance of 2% is applied to the rest. What is the total allowance?

    • A) Rs. 3,400
    • B) Rs. 3,500
    • C) Rs. 2,500
    • D) Rs. 900
    Show answer & explanation

    Answer: A) Rs. 3,400

    Specific allowance = 50% of 5,000 = 2,500. Remaining 'good' pool = 50,000 - 5,000 = 45,000. General allowance = 2% of 45,000 = 900. Total allowance = 2,500 + 900 = Rs. 3,400.

41. Question 41

    Which of the following describes the core distinction between 'Bad Debts' and 'Allowance for Doubtful Debts'?

    • A) Bad debts are estimates, while the allowance represents confirmed losses.
    • B) Bad debts are confirmed losses written off the ledger, while the allowance is a contra-asset estimate for future unconfirmed losses.
    • C) Bad debts apply to cash sales, while the allowance applies to credit sales.
    • D) They are identical terms for the exact same accounting entry.
    Show answer & explanation

    Answer: B) Bad debts are confirmed losses written off the ledger, while the allowance is a contra-asset estimate for future unconfirmed losses.

    A bad debt is a factual, recognized loss that removes the receivable. An allowance is a provision/estimate for potential future defaults on debts that currently remain on the books.

42. Question 42

    In the context of doubtful debts, what is the accounting treatment for a customer who disputes an invoice and refuses to pay, but the company continues to pursue legal action for recovery?

    • A) Write the debt off entirely as a bad debt.
    • B) Retain the gross receivable and create a specific allowance against it.
    • C) Reverse the original sales transaction.
    • D) Transfer the debt to the supplier's payables ledger.
    Show answer & explanation

    Answer: B) Retain the gross receivable and create a specific allowance against it.

    Because the company is still pursuing recovery (it is not 100% irrecoverable yet), the debt cannot be written off. Instead, a specific allowance is created to reflect the high risk of non-payment.

43. Question 43

    If an accountant calculates the general allowance on the GROSS receivables balance without first deducting a recently identified bad debt of Rs. 10,000, what will be the resulting error?

    • A) The allowance will be understated.
    • B) The allowance will be perfectly accurate.
    • C) The allowance will be overstated.
    • D) The bad debt will automatically reverse.
    Show answer & explanation

    Answer: C) The allowance will be overstated.

    By applying the percentage to a pool that includes a debt known to be bad (and therefore holding a 0% chance of recovery through the general pool), the calculated general allowance estimate will be artificially inflated (overstated).

44. Question 44

    At 1 January, the allowance for doubtful debts was Rs. 35,000. During the year, Rs. 15,000 of debts were written off. At 31 December, the required allowance is evaluated at Rs. 30,000. What is the net impact of these transactions on the Statement of Profit or Loss?

    • A) Net expense of Rs. 15,000
    • B) Net expense of Rs. 10,000
    • C) Net income of Rs. 5,000
    • D) Net expense of Rs. 20,000
    Show answer & explanation

    Answer: B) Net expense of Rs. 10,000

    Bad debt written off = 15,000 expense. Decrease in allowance = 35,000 - 30,000 = 5,000 income (reduction in expense). Net impact = 15,000 - 5,000 = Rs. 10,000 expense.

45. Question 45

    Which of the following is true regarding the presentation of the 'Allowance for Doubtful Debts' in the Statement of Financial Position?

    • A) It is presented under Equity.
    • B) It is added to Trade Receivables.
    • C) It is shown as a Current Liability.
    • D) It is deducted from Gross Trade Receivables to show Net Trade Receivables.
    Show answer & explanation

    Answer: D) It is deducted from Gross Trade Receivables to show Net Trade Receivables.

    As a contra-asset, the allowance is shown as a deduction from the related asset (Gross Trade Receivables) in the Current Assets section.

46. Question 46

    A company has opening receivables of Rs. 500,000. Sales are Rs. 1,000,000. Cash collected is Rs. 900,000. A debt of Rs. 20,000 is written off. What is the closing Net Receivables if a 5% allowance is maintained?

    • A) Rs. 580,000
    • B) Rs. 551,000
    • C) Rs. 600,000
    • D) Rs. 570,000
    Show answer & explanation

    Answer: B) Rs. 551,000

    Gross Closing Receivables = 500,000 + 1,000,000 - 900,000 - 20,000 = Rs. 580,000. Allowance = 5% x 580,000 = 29,000. Net Receivables = 580,000 - 29,000 = Rs. 551,000.

47. Question 47

    If an entity successfully collects a debt that was written off in the PREVIOUS financial year, does this collection affect the current year's Gross Trade Receivables balance?

    • A) Yes, it increases Gross Receivables.
    • B) Yes, it decreases Gross Receivables.
    • C) No, it has no effect on Gross Receivables.
    • D) Yes, it converts it to a Non-Current Asset.
    Show answer & explanation

    Answer: C) No, it has no effect on Gross Receivables.

    Because the debt was written off previously, it is no longer part of the receivables ledger. The recovery simply debits Cash and credits Bad Debts Recovered (Profit or Loss), completely bypassing the receivables control account.

48. Question 48

    What is the primary reason an auditor might insist a company increases its Allowance for Doubtful Debts?

    • A) The company wants to show higher profits to shareholders.
    • B) A major customer has just filed for bankruptcy protection and their debt is still on the books.
    • C) The company has too much physical cash in the bank.
    • D) The company wants to increase its total assets.
    Show answer & explanation

    Answer: B) A major customer has just filed for bankruptcy protection and their debt is still on the books.

    A major customer facing bankruptcy indicates a high probability of non-payment. To comply with prudence, the allowance must be increased to reflect this specific, identifiable risk.

49. Question 49

    A business wrote off Rs. 26,000 in bad debts during the year. Its opening allowance was Rs. 30,000. It desires a closing allowance of Rs. 22,000. What is the total Bad and Doubtful Debt expense charged to the Statement of Profit or Loss?

    • A) Rs. 26,000
    • B) Rs. 18,000
    • C) Rs. 34,000
    • D) Rs. 8,000
    Show answer & explanation

    Answer: B) Rs. 18,000

    Bad debt written off = 26,000 expense. The allowance decreases from 30,000 to 22,000, creating an 8,000 reduction in expense. Total charge = 26,000 - 8,000 = Rs. 18,000.

50. Question 50

    Which of the following directly REDUCES the 'Gross Trade Receivables' balance?

    • A) Creating a general allowance for doubtful debts.
    • B) Creating a specific allowance for doubtful debts.
    • C) Writing off an irrecoverable bad debt.
    • D) A customer disputing an invoice.
    Show answer & explanation

    Answer: C) Writing off an irrecoverable bad debt.

    Creating allowances (both general and specific) creates a contra-asset but does not change the gross receivables figure. Only a formal bad debt write-off physically credits and reduces the gross receivables ledger balance.

51. Question 51

    Which of the following scenarios describes a situation where an account receivable should be classified as a 'Bad Debt' rather than a 'Doubtful Debt'?

    • A) A customer is experiencing severe, temporary cash flow difficulties.
    • B) A customer is disputing an invoice due to damaged goods.
    • C) A customer has been officially declared bankrupt and the liquidator confirmed no payout will be made.
    • D) A customer routinely pays 30 days past the due date.
    Show answer & explanation

    Answer: C) A customer has been officially declared bankrupt and the liquidator confirmed no payout will be made.

    A debt becomes a 'bad debt' when it is clearly identified as not being collectible with certainty. Bankruptcy with a confirmed zero payout represents a definitive loss, whereas financial difficulties or disputes only make the debt 'doubtful'.

52. Question 52

    What is the primary accounting concept that justifies the creation of an 'Allowance for Doubtful Debts' before a specific customer officially defaults?

    • A) Materiality Concept
    • B) Prudence Concept
    • C) Historical Cost Concept
    • D) Business Entity Concept
    Show answer & explanation

    Answer: B) Prudence Concept

    The prudence concept allows and requires a business to record an allowance for doubtful debts to ensure that assets (receivables) are not overstated, even if the actual loss has not yet occurred.

53. Question 53

    When a business decides to formally write off an irrecoverable debt of Rs. 15,000, what is the standard double-entry journal record?

    • A) Debit Trade Receivables Rs. 15,000; Credit Bad Debt Expense Rs. 15,000
    • B) Debit Bad Debt Expense Rs. 15,000; Credit Allowance for Doubtful Debts Rs. 15,000
    • C) Debit Bad Debt Expense Rs. 15,000; Credit Trade Receivables Rs. 15,000
    • D) Debit Allowance for Doubtful Debts Rs. 15,000; Credit Trade Receivables Rs. 15,000
    Show answer & explanation

    Answer: C) Debit Bad Debt Expense Rs. 15,000; Credit Trade Receivables Rs. 15,000

    Writing off a bad debt requires recording the loss as an expense (Debit Bad Debt Expense) and permanently removing the debt from the customer's account in the ledger (Credit Trade Receivables/Accounts Receivable).

54. Question 54

    How is the 'Allowance for Doubtful Debts' account fundamentally classified within the general ledger?

    • A) A current liability account
    • B) An expense account
    • C) A revenue account
    • D) A contra for asset account
    Show answer & explanation

    Answer: D) A contra for asset account

    The allowance for doubtful debts carries a credit balance and is presented in the statement of financial position as a deduction from Gross Trade Receivables, making it a contra-asset account.

55. Question 55

    At year-end, 'Alpha Corp' requires a closing allowance for doubtful debts of Rs. 25,000. The opening balance of the allowance account was Rs. 18,000. What is the required adjusting entry?

    • A) Debit Bad Debt Expense Rs. 7,000; Credit Allowance for Doubtful Debts Rs. 7,000
    • B) Debit Allowance for Doubtful Debts Rs. 7,000; Credit Bad Debt Expense Rs. 7,000
    • C) Debit Bad Debt Expense Rs. 25,000; Credit Allowance for Doubtful Debts Rs. 25,000
    • D) Debit Trade Receivables Rs. 7,000; Credit Allowance for Doubtful Debts Rs. 7,000
    Show answer & explanation

    Answer: A) Debit Bad Debt Expense Rs. 7,000; Credit Allowance for Doubtful Debts Rs. 7,000

    The allowance must be increased by Rs. 7,000 (25,000 - 18,000). This is recorded by recognizing an additional expense (Debit Bad Debt Expense) and increasing the contra-asset (Credit Allowance for Doubtful Debts).

56. Question 56

    If the required closing allowance for doubtful debts is Rs. 12,000, but the opening balance was Rs. 20,000, what is the net impact of the adjusting entry on the Statement of Profit or Loss?

    • A) An expense of Rs. 8,000
    • B) An income (or reduction in expense) of Rs. 8,000
    • C) An expense of Rs. 12,000
    • D) An income of Rs. 20,000
    Show answer & explanation

    Answer: B) An income (or reduction in expense) of Rs. 8,000

    Because the required closing allowance is lower than the opening balance, the adjustment decreases the allowance by Rs. 8,000. This is credited to the Bad Debt Expense (or a separate income account), effectively increasing the net profit.

57. Question 57

    An irrecoverable debt of Rs. 5,000 that was formally written off in the previous year is unexpectedly paid by the customer via cheque. What is the correct double-entry for this transaction?

    • A) Debit Bank Rs. 5,000; Credit Trade Receivables Rs. 5,000
    • B) Debit Bank Rs. 5,000; Credit Bad Debts Recovered (Income/Expense) Rs. 5,000
    • C) Debit Trade Receivables Rs. 5,000; Credit Bank Rs. 5,000
    • D) Debit Bank Rs. 5,000; Credit Allowance for Doubtful Debts Rs. 5,000
    Show answer & explanation

    Answer: B) Debit Bank Rs. 5,000; Credit Bad Debts Recovered (Income/Expense) Rs. 5,000

    Since the debt was already written off, the customer's receivable balance is zero. The cash received increases the bank balance and is recorded directly as income (or a reduction of bad debt expense) called Bad Debts Recovered.

58. Question 58

    What is the specific difference between a 'Specific Allowance' and a 'General Allowance' for doubtful debts?

    • A) Specific allowances apply to cash sales; general allowances apply to credit sales.
    • B) Specific allowances are legally required; general allowances are optional.
    • C) Specific allowances target identified, individual high-risk customers, while general allowances apply a percentage to the remaining pool of standard receivables.
    • D) Specific allowances are recorded as liabilities; general allowances are recorded as assets.
    Show answer & explanation

    Answer: C) Specific allowances target identified, individual high-risk customers, while general allowances apply a percentage to the remaining pool of standard receivables.

    A specific allowance is created when a known customer is in trouble (e.g., dispute, financial crisis). A general allowance is applied to all other 'good' debts based on historical default probabilities.

59. Question 59

    When calculating the base amount for a General Allowance percentage, which of the following MUST first be deducted from the gross Trade Receivables balance?

    • A) Only specific allowances
    • B) Only bad debts written off
    • C) Both bad debts to be written off and the balances of customers requiring specific allowances
    • D) The opening balance of the general allowance
    Show answer & explanation

    Answer: C) Both bad debts to be written off and the balances of customers requiring specific allowances

    The general allowance must only be applied to the remaining 'normal' pool of receivables. Therefore, bad debts (which are zero value) and specific risky balances (which are already provided for) must be deducted first.

60. Question 60

    'Beta Corp' has a Gross Receivables balance of Rs. 400,000. A debt of Rs. 15,000 is to be written off. A specific allowance of Rs. 20,000 is required for another customer. If a 5% general allowance is applied to the remainder, what is the TOTAL closing allowance?

    • A) Rs. 38,250
    • B) Rs. 18,250
    • C) Rs. 35,000
    • D) Rs. 20,000
    Show answer & explanation

    Answer: A) Rs. 38,250

    Base for general allowance = 400,000 - 15,000 (bad debt) - 20,000 (specific customer balance) = 365,000. General allowance = 5% x 365,000 = 18,250. Total allowance = 18,250 + 20,000 (specific) = Rs. 38,250.

61. Question 61

    A business wrote off Rs. 25,000 in bad debts during the year. The opening allowance was Rs. 30,000. The required closing allowance is Rs. 26,000. What is the total charge to the Statement of Profit or Loss for bad and doubtful debts?

    • A) Rs. 25,000
    • B) Rs. 21,000
    • C) Rs. 29,000
    • D) Rs. 51,000
    Show answer & explanation

    Answer: B) Rs. 21,000

    Bad debt expense = 25,000. The allowance decreases from 30,000 to 26,000, creating an income (reduction in expense) of 4,000. Total charge = 25,000 - 4,000 = Rs. 21,000.

62. Question 62

    If a business decides to create a specific allowance of 100% against a customer's debt of Rs. 10,000, does this action physically reduce the 'Gross Trade Receivables' balance in the ledger?

    • A) Yes, it reduces it by Rs. 10,000.
    • B) No, the gross balance remains unchanged until the debt is formally written off.
    • C) Yes, but only by 50%.
    • D) No, it increases the gross balance.
    Show answer & explanation

    Answer: B) No, the gross balance remains unchanged until the debt is formally written off.

    Creating an allowance (even a 100% specific allowance) creates a contra-asset account. The gross receivables balance in the ledger remains unchanged until management formally decides to write the debt off completely.

63. Question 63

    An 'Aging Analysis' schedules outstanding receivables into time brackets (e.g., 30 days, 60 days, 90+ days). Which bracket typically requires the highest percentage of allowance for doubtful debts?

    • A) 0 - 30 days
    • B) 31 - 60 days
    • C) 61 - 90 days
    • D) Over 90 days old Receivables
    Show answer & explanation

    Answer: D) Over 90 days old Receivables

    Statistically, the longer an invoice remains unpaid past its due date, the higher the probability that it will become a bad debt. Therefore, the oldest bracket receives the highest allowance percentage.

64. Question 64

    An accountant wrote off a bad debt of Rs. 4,000 by debiting Bad Debt Expense and incorrectly crediting Accounts Payable instead of Trade Receivables. What is the impact of this error on the financial statements?

    • A) Profit is unaffected, but Assets and Liabilities are both overstated by Rs. 4,000.
    • B) Profit is overstated by Rs. 4,000.
    • C) Profit is understated by Rs. 4,000.
    • D) Assets and Liabilities are both understated by Rs. 4,000.
    Show answer & explanation

    Answer: A) Profit is unaffected, but Assets and Liabilities are both overstated by Rs. 4,000.

    The expense was recorded correctly, so profit is accurate. However, crediting Payables wrongly increased liabilities, and failing to credit Receivables left assets too high. Thus, both are overstated.

65. Question 65

    In the Statement of Financial Position, how is the 'Net Trade Receivables' figure calculated?

    • A) Gross Receivables + Bad Debts Written Off
    • B) Gross Receivables + Allowance for Doubtful Debts
    • C) Gross Receivables - Allowance for Doubtful Debts
    • D) Gross Receivables - Cash Collected
    Show answer & explanation

    Answer: C) Gross Receivables - Allowance for Doubtful Debts

    Net Trade Receivables represents the estimated realizable cash value of the debts, calculated by subtracting the total allowance for doubtful debts from the gross receivables balance.

66. Question 66

    If a business fails to write off a confirmed bad debt of Rs. 8,000 at year-end, what is the direct impact on the Net Profit?

    • A) Net Profit is understated by Rs. 8,000.
    • B) Net Profit is overstated by Rs. 8,000.
    • C) Net Profit is unaffected.
    • D) Net Profit is overstated by Rs. 16,000.
    Show answer & explanation

    Answer: B) Net Profit is overstated by Rs. 8,000.

    Failing to write off the bad debt means the Bad Debt Expense is not recorded. If expenses are lower than they should be, the reported Net Profit is artificially higher (overstated).

67. Question 67

    Opening receivables were Rs. 175,000. Credit sales were Rs. 386,000. Cash collected was Rs. 356,000. Bad debts written off were Rs. 6,000. Sales returns were Rs. 4,000. Discount allowed was Rs. 6,000. What is the closing GROSS Receivables balance?

    • A) Rs. 189,000
    • B) Rs. 195,000
    • C) Rs. 185,000
    • D) Rs. 193,000
    Show answer & explanation

    Answer: A) Rs. 189,000

    Closing Gross Receivables = Opening (175,000) + Credit Sales (386,000) - Cash Collected (356,000) - Bad Debts (6,000) - Returns (4,000) - Discount Allowed (6,000) = Rs. 189,000.

68. Question 68

    Using the Gross Receivables of Rs. 189,000 from the previous question, if the business maintains a 5% general allowance, what is the Net Trade Receivables figure in the Statement of Financial Position?

    • A) Rs. 189,000
    • B) Rs. 179,550
    • C) Rs. 198,450
    • D) Rs. 9,450
    Show answer & explanation

    Answer: B) Rs. 179,550

    Allowance = 5% of 189,000 = 9,450. Net Receivables = Gross (189,000) - Allowance (9,450) = Rs. 179,550.

69. Question 69

    An entity has an opening allowance of Rs. 10,000. During the year, they wrote off Rs. 4,000 in bad debts and recovered Rs. 1,000 from a debt written off years ago. The required closing allowance is Rs. 12,000. What is the net charge to the Statement of Profit or Loss?

    • A) Rs. 5,000
    • B) Rs. 7,000
    • C) Rs. 6,000
    • D) Rs. 4,000
    Show answer & explanation

    Answer: A) Rs. 5,000

    Bad debt written off = 4,000 (expense). Increase in allowance = 12,000 - 10,000 = 2,000 (expense). Bad debt recovered = 1,000 (income). Net charge = 4,000 + 2,000 - 1,000 = Rs. 5,000.

70. Question 70

    Which of the following scenarios describes a 'Good Debt'?

    • A) A customer who has declared bankruptcy.
    • B) A customer who is disputing an invoice.
    • C) A customer whose invoice is 120 days overdue.
    • D) An account receivable that is clearly identified as collectible with certainty.
    Show answer & explanation

    Answer: D) An account receivable that is clearly identified as collectible with certainty.

    A good debt is an account receivable that is clearly identified as collectible with certainty. No accounting treatment (allowance or write-off) is required for a good debt.

71. Question 71

    If a business decides that an outstanding balance of Rs. 10,000 is 100% irrecoverable, what is the impact on the 'Allowance for Doubtful Debts' account at the exact moment of the write-off (under standard PRC-1 methodology)?

    • A) It decreases the allowance by Rs. 10,000.
    • B) It increases the allowance by Rs. 10,000.
    • C) It has no direct impact on the allowance account at that moment.
    • D) It transfers the balance to equity.
    Show answer & explanation

    Answer: C) It has no direct impact on the allowance account at that moment.

    A formal write-off debits Bad Debt Expense and credits Trade Receivables. The Allowance account remains untouched during the write-off and is only adjusted separately at the period-end evaluation.

72. Question 72

    The turnover of a business was Rs. 2,000,000. Trade receivables are 5% of turnover. The business wishes to have an allowance of 4% of receivables, which would make the allowance one-third higher than the opening allowance. What was the opening allowance?

    • A) Rs. 3,000
    • B) Rs. 4,000
    • C) Rs. 1,000
    • D) Rs. 5,000
    Show answer & explanation

    Answer: A) Rs. 3,000

    Receivables = 5% of 2M = 100,000. Closing allowance = 4% of 100,000 = 4,000. If 4,000 is 1/3 higher than Opening (X), then 4,000 = X + (1/3)X = (4/3)X. Therefore, X = 3,000.

73. Question 73

    If an entity recovers a previously written-off debt but mistakenly credits it to the customer's account in the Receivables Ledger instead of Profit or Loss, what is the effect on the financial statements?

    • A) Profit is understated, and Receivables are understated.
    • B) Profit is overstated, and Receivables are overstated.
    • C) Profit is unaffected, but Receivables are understated.
    • D) Profit is understated, but Receivables are unaffected.
    Show answer & explanation

    Answer: A) Profit is understated, and Receivables are understated.

    Crediting Receivables instead of Bad Debts Recovered (Income) artificially reduces the Receivables balance (understating assets) and fails to record the income (understating profit).

74. Question 74

    A customer owes Rs. 50,000 and goes bankrupt. The liquidator announces that unsecured creditors will receive 20 cents on the dollar. What amount must be written off as a bad debt?

    • A) Rs. 10,000
    • B) Rs. 40,000
    • C) Rs. 50,000
    • D) Rs. 0
    Show answer & explanation

    Answer: B) Rs. 40,000

    The business will receive 20% (10,000). The remaining 80% (40,000) is irrecoverable and must be written off as a bad debt.

75. Question 75

    At the start of the year, the allowance for doubtful debts was Rs. 15,000. At year-end, gross receivables are Rs. 300,000. The business decides to create a 6% allowance. What is the journal entry for the adjustment?

    • A) Debit Bad Debt Expense Rs. 3,000; Credit Allowance Rs. 3,000
    • B) Debit Allowance Rs. 3,000; Credit Bad Debt Expense Rs. 3,000
    • C) Debit Bad Debt Expense Rs. 18,000; Credit Allowance Rs. 18,000
    • D) Debit Allowance Rs. 15,000; Credit Trade Receivables Rs. 15,000
    Show answer & explanation

    Answer: A) Debit Bad Debt Expense Rs. 3,000; Credit Allowance Rs. 3,000

    Required closing allowance = 6% x 300,000 = 18,000. Opening is 15,000. The allowance must increase by 3,000. Entry: Debit Expense, Credit Allowance.

76. Question 76

    Which of the following actions directly REDUCES the total of 'Current Assets' in the Statement of Financial Position?

    • A) An increase in the Allowance for Doubtful Debts.
    • B) A decrease in the Allowance for Doubtful Debts.
    • C) Recovering a bad debt previously written off.
    • D) Making a credit sale.
    Show answer & explanation

    Answer: A) An increase in the Allowance for Doubtful Debts.

    Because the allowance is a contra-asset deducted from gross receivables, increasing the allowance directly reduces the Net Trade Receivables, thereby reducing total Current Assets.

77. Question 77

    An entity has gross receivables of Rs. 868,500. It writes off Rs. 28,500. It then calculates a 5% general allowance on the remainder. If the opening allowance was Rs. 38,000, what is the charge to the Statement of Profit or Loss for the allowance adjustment only?

    • A) Rs. 4,000 Expense
    • B) Rs. 4,000 Income
    • C) Rs. 42,000 Expense
    • D) Rs. 32,500 Expense
    Show answer & explanation

    Answer: A) Rs. 4,000 Expense

    Closing allowance = 5% x (868,500 - 28,500) = 42,000. Opening = 38,000. The increase is 4,000, which is an expense charge for the adjustment.

78. Question 78

    If an entity has a 'Bad and Doubtful Debts Expense' account with a year-end debit total of Rs. 15,000 and a credit total of Rs. 6,000 (from an allowance reduction), what is the final closing entry?

    • A) Debit Profit or Loss Rs. 9,000; Credit Bad and Doubtful Debts Expense Rs. 9,000
    • B) Debit Bad and Doubtful Debts Expense Rs. 9,000; Credit Profit or Loss Rs. 9,000
    • C) Debit Profit or Loss Rs. 15,000; Credit Bad and Doubtful Debts Expense Rs. 15,000
    • D) Debit Allowance Rs. 9,000; Credit Profit or Loss Rs. 9,000
    Show answer & explanation

    Answer: A) Debit Profit or Loss Rs. 9,000; Credit Bad and Doubtful Debts Expense Rs. 9,000

    The net expense balance is a debit of 9,000 (15k - 6k). To close the account, it must be credited by 9,000, and the Profit or Loss account must be debited (recording the expense).

79. Question 79

    Customer 'Zeta' owes Rs. 12,000 but is refusing to pay due to a quality dispute. The company is suing them. How should this be handled in the accounts?

    • A) Write it off immediately as a bad debt.
    • B) Ignore it until the lawsuit is settled.
    • C) Maintain the receivable and create a specific allowance for the doubtful amount.
    • D) Deduct it from sales revenue.
    Show answer & explanation

    Answer: C) Maintain the receivable and create a specific allowance for the doubtful amount.

    Because the debt is disputed but still being pursued (not 100% irrecoverable), it should remain in receivables, but prudence requires creating a specific allowance against the high risk of non-payment.

80. Question 80

    When extracting an unadjusted trial balance, the 'Allowance for Doubtful Debts' balance shown represents:

    • A) The newly calculated required closing balance.
    • B) The bad debts written off during the year.
    • C) The unadjusted opening balance from the start of the year.
    • D) The net receivables figure.
    Show answer & explanation

    Answer: C) The unadjusted opening balance from the start of the year.

    Before year-end adjustments are made, the allowance account in the unadjusted trial balance still reflects the balance brought forward from the previous accounting period.

81. Question 81

    A business has opening receivables of Rs. 80,000. It writes off a debt of Rs. 5,000. It wishes to maintain an allowance of 5%. If the opening allowance was Rs. 3,500, what is the net expense charged to Profit or Loss?

    • A) Rs. 5,000
    • B) Rs. 5,250
    • C) Rs. 8,750
    • D) Rs. 1,250
    Show answer & explanation

    Answer: B) Rs. 5,250

    Closing allowance = 5% x (80,000 - 5,000) = 3,750. Increase in allowance = 3,750 - 3,500 = 250. Total expense = 5,000 (bad debt) + 250 (allowance increase) = Rs. 5,250.

82. Question 82

    If a business decides that a general allowance for doubtful debts is no longer required due to changing to a strict 'cash-only' business model, what is the accounting entry to eliminate the existing allowance?

    • A) Debit Allowance for Doubtful Debts; Credit Bad Debt Expense (or Income)
    • B) Debit Bad Debt Expense; Credit Allowance for Doubtful Debts
    • C) Debit Trade Receivables; Credit Allowance for Doubtful Debts
    • D) Debit Cash; Credit Allowance for Doubtful Debts
    Show answer & explanation

    Answer: A) Debit Allowance for Doubtful Debts; Credit Bad Debt Expense (or Income)

    To eliminate the allowance (a credit balance), you must debit the Allowance account and credit the expense/income account to reverse the previously recognized provision, increasing current profit.

83. Question 83

    An aged receivables schedule shows: Less than 31 days (Rs. 54,200), 31-60 days (Rs. 32,500), Over 60 days (Rs. 12,080). Required allowance is Nil for <31 days, 5% for 31-60 days, and 49% for >60 days. What is the total closing allowance?

    • A) Rs. 7,544.2
    • B) Rs. 5,919.2
    • C) Rs. 1,625
    • D) Rs. 10,000
    Show answer & explanation

    Answer: A) Rs. 7,544.2

    (32,500 x 5%) = 1,625. (12,080 x 49%) = 5,919.2. Total = 1,625 + 5,919.2 = Rs. 7,544.2.

84. Question 84

    If an accountant calculates the required closing allowance to be Rs. 5,000, but mistakenly credits the Trade Receivables account directly instead of the Allowance account, what is the consequence?

    • A) Net Trade Receivables will be correctly stated, but Gross Receivables will be understated.
    • B) Net Trade Receivables will be overstated.
    • C) Profit will be understated.
    • D) The trial balance will not agree.
    Show answer & explanation

    Answer: A) Net Trade Receivables will be correctly stated, but Gross Receivables will be understated.

    Crediting Trade Receivables physically removes the 5k from the gross balance. The Net presentation will mathematically be the same, but the formal Gross figure and contra-asset presentation will be structurally incorrect.

85. Question 85

    A business has an opening allowance of Rs. 4,000. It recovers a bad debt of Rs. 1,500. It requires a closing allowance of Rs. 3,000. There are no bad debts written off. What is the net impact on the Statement of Profit or Loss?

    • A) Income of Rs. 1,500
    • B) Income of Rs. 2,500
    • C) Expense of Rs. 500
    • D) Income of Rs. 1,000
    Show answer & explanation

    Answer: B) Income of Rs. 2,500

    Recovery = 1,500 income. Decrease in allowance (4,000 - 3,000) = 1,000 income. Total net impact = 1,500 + 1,000 = Rs. 2,500 income (or reduction in expense).

86. Question 86

    Which of the following sets of factors would prompt a business to INCREASE its general allowance percentage?

    • A) A booming economy and strict new credit checks.
    • B) A recession, rising unemployment, and relaxed credit terms.
    • C) Customers paying faster to receive early settlement discounts.
    • D) A switch to a cash-only sales policy.
    Show answer & explanation

    Answer: B) A recession, rising unemployment, and relaxed credit terms.

    Economic downturns and relaxed credit terms increase the statistical probability that the 'normal' pool of customers will default, necessitating a higher general allowance percentage.

87. Question 87

    In the general ledger, what type of balance does the 'Bad Debt Expense' account naturally possess?

    • A) A debit balance
    • B) A credit balance
    • C) A zero balance at all times
    • D) A contra-liability balance
    Show answer & explanation

    Answer: A) A debit balance

    Like all operating expense accounts, the Bad Debt Expense account natively carries a debit balance during the accounting period.

88. Question 88

    If 'Nexus Corp' has a total receivables balance of Rs. 500,000 and the allowance for doubtful debts is Rs. 25,000, what is the 'Carrying Amount' of the receivables in the balance sheet?

    • A) Rs. 525,000
    • B) Rs. 500,000
    • C) Rs. 475,000
    • D) Rs. 25,000
    Show answer & explanation

    Answer: C) Rs. 475,000

    The carrying amount (Net Trade Receivables) is the gross balance minus the allowance. 500,000 - 25,000 = Rs. 475,000.

89. Question 89

    A customer owing Rs. 2,000 is declared bankrupt. The liquidator pays 30% as a final settlement. What is the bad debt expense to be recognized?

    • A) Rs. 600
    • B) Rs. 1,400
    • C) Rs. 2,000
    • D) Rs. 0
    Show answer & explanation

    Answer: B) Rs. 1,400

    The business receives Rs. 600 (30%). The remaining Rs. 1,400 (70%) is irrecoverable and must be written off as a bad debt.

90. Question 90

    If an entity has zero opening allowance and creates an allowance of Rs. 5,000 at year-end, what is the effect on the fundamental accounting equation?

    • A) Assets increase by 5,000, Equity increases by 5,000.
    • B) Assets decrease by 5,000, Liabilities increase by 5,000.
    • C) Assets decrease by 5,000, Equity decreases by 5,000.
    • D) Only Liabilities increase.
    Show answer & explanation

    Answer: C) Assets decrease by 5,000, Equity decreases by 5,000.

    The creation of the allowance decreases Net Trade Receivables (Assets decrease by 5k) and creates an expense which reduces profit (Equity decreases by 5k), keeping the equation balanced.

91. Question 91

    A business wrote off Rs. 3,000 as a bad debt, but later the same year the customer paid Rs. 1,000 of it. How is the Rs. 1,000 receipt recorded assuming the business uses a combined 'Bad and Doubtful Debts Expense' account?

    • A) Debit Bank Rs. 1,000; Credit Trade Receivables Rs. 1,000
    • B) Debit Bank Rs. 1,000; Credit Bad and Doubtful Debts Expense Rs. 1,000
    • C) Debit Bank Rs. 1,000; Credit Allowance for Doubtful Debts Rs. 1,000
    • D) Debit Trade Receivables Rs. 1,000; Credit Bank Rs. 1,000
    Show answer & explanation

    Answer: B) Debit Bank Rs. 1,000; Credit Bad and Doubtful Debts Expense Rs. 1,000

    Because the debt was already written off, the receipt of cash bypasses the receivables ledger and is credited directly to the Bad Debt Expense account, reducing the overall expense for the year.

92. Question 92

    When presenting the Statement of Financial Position, what is the most transparent way to report receivables?

    • A) Only show the Net Receivables figure.
    • B) Show Gross Receivables as a current asset and the Allowance as a current liability.
    • C) Show Gross Trade Receivables, explicitly deduct the Allowance for Doubtful Debts, and present the resulting Net Trade Receivables.
    • D) Show Gross Receivables and ignore the allowance.
    Show answer & explanation

    Answer: C) Show Gross Trade Receivables, explicitly deduct the Allowance for Doubtful Debts, and present the resulting Net Trade Receivables.

    To provide full transparency to users, financial statements typically present the Gross Trade Receivables, explicitly show the deduction of the Allowance, and arrive at the Net carrying amount.

93. Question 93

    If an entity routinely experiences a 2% bad debt rate on its credit sales of Rs. 1,000,000, and decides to base its allowance strictly on sales rather than receivables balance, what is the estimated bad debt expense for the year?

    • A) Rs. 20,000
    • B) Rs. 2,000
    • C) Rs. 50,000
    • D) Rs. 0
    Show answer & explanation

    Answer: A) Rs. 20,000

    If the allowance/expense is estimated as a percentage of sales (the income statement approach), the expense is 2% of Rs. 1,000,000 = Rs. 20,000.

94. Question 94

    Which of the following is NOT a valid reason for a business to maintain an Allowance for Doubtful Debts?

    • A) To ensure current assets are not overstated.
    • B) To match anticipated bad debt expenses against the revenue of the period in which the sale occurred.
    • C) To comply with the prudence concept.
    • D) To legally guarantee that the business will not have to pay taxes on uncollected invoices.
    Show answer & explanation

    Answer: D) To legally guarantee that the business will not have to pay taxes on uncollected invoices.

    Tax rules vary by jurisdiction and often do not allow tax deductions for general allowances. The accounting reasons are rooted in prudence, matching, and fair presentation of assets.

95. Question 95

    Which of the following statements is correct regarding the accounting treatment for 'Good Debts'?

    • A) They require a specific allowance.
    • B) They do not require any special accounting treatment, unlike bad and doubtful debts.
    • C) They must be deducted from the gross receivables before closing the books.
    • D) They are treated as liabilities.
    Show answer & explanation

    Answer: B) They do not require any special accounting treatment, unlike bad and doubtful debts.

    A good debt is an account receivable clearly identified as collectible. It requires no special accounting treatment or allowances.

96. Question 96

    The double entry to record the withdrawal of cash from a business bank account by the owner is:

    • A) Debit Drawings, Credit Bank
    • B) Debit Bank, Credit Drawings
    • C) Debit Capital, Credit Bank
    • D) Debit Bank, Credit Capital
    Show answer & explanation

    Answer: A) Debit Drawings, Credit Bank

    Withdrawal of cash by the owner decreases the business bank asset (Credit Bank) and increases Drawings, which decreases equity (Debit Drawings).

97. Question 97

    Opening allowance for doubtful debts was Rs. 300. Closing receivables are Rs. 10,000. A bad debt of Rs. 1,000 was written off before calculation of the allowance, but the accountant missed the written off amount while calculating the 5% closing allowance. What is the impact on profit due to this mistake?

    • A) Profit is understated by Rs. 50
    • B) Profit is overstated by Rs. 50
    • C) Profit is overstated by Rs. 1,000
    • D) No impact on profit
    Show answer & explanation

    Answer: A) Profit is understated by Rs. 50

    Correct receivables for allowance = 10,000 - 1,000 = 9,000. Correct allowance = 5% of 9,000 = 450. Incorrect allowance calculated = 5% of 10,000 = 500. Allowance (and expense) is overstated by 50, causing Profit to be understated by Rs. 50.

98. Question 98

    After writing off bad debts, Rashid has outstanding receivables of Rs. 238,750. He creates specific allowances of Rs. 450 and Rs. 1,200. He also maintains a general allowance of 5% of remaining receivables. What is the Net Receivables amount on the SOFP?

    • A) Rs. 238,750
    • B) Rs. 226,812.5
    • C) Rs. 225,245
    • D) Rs. 228,000
    Show answer & explanation

    Answer: C) Rs. 225,245

    Specific allowance = 450 + 1200 = 1650. Base for general = 238,750 - 1650 = 237,100. General allowance = 5% of 237,100 = 11,855. Total allowance = 1650 + 11,855 = 13,505. Net Receivables = 238,750 - 13,505 = Rs. 225,245.

99. Question 99

    Journal entry to record a decrease in allowance during the year is:

    • A) Dr. Bad debt expense, Cr. Allowance for doubtful debts
    • B) Dr. Accounts receivables, Cr. Allowance for doubtful debts
    • C) Dr. Allowance for doubtful debts, Cr. Bad debt expense
    • D) Dr. Allowance for doubtful debts, Cr. Accounts receivables
    Show answer & explanation

    Answer: C) Dr. Allowance for doubtful debts, Cr. Bad debt expense

    A decrease in the allowance requires debiting the Allowance for Doubtful Debts (to reduce the credit balance) and crediting Bad Debt Expense (or a separate income account).

100. Question 100

     At 1 January 2017, the allowance for receivable of Sidra was Rs. 35,000. During the year ended 31 December 2017, debts totaling Rs. 15,000 were written off. It was decided the allowance should be Rs. 30,000 as at Dec 31. What is the amount charged to the statement of comprehensive income?

     • A) Rs. 15,000
     • B) Rs. 10,000
     • C) Rs. 20,000
     • D) Rs. 5,000
     Show answer & explanation

     Answer: B) Rs. 10,000

     Bad debts written off = 15,000 expense. The allowance decreases from 35,000 to 30,000, creating an income (or reduction of expense) of 5,000. Net charge = 15,000 - 5,000 = Rs. 10,000.