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Dear sir, I really don’t understand what the examiner is asking for?
At the end of its financial year a business had accounts receivable of $16 000 and had a bad debts provision of $640. The provision is to be maintained at 5% of accounts receivable.
What is the charge for rates in the 2010 income statement?
A $160 credit B $160 debit C $800 credit D $800 debit
Firstly it seems that you are using a very old book!
We stopped using the term ‘bad debt provision’ many years ago. It is called ‘allowance for receivables’ (and that is what it will be called in the exam!).Secondly, if you have copied the whole of the question correctly, then it is nonsense. There is not mention of rates and so the question is impossible.
I can only assume that the question intended to ask what the charge for irrecoverable and doubtful debts was! In which case the allowance (provision) required at the end of the year is 5% x $16,000 = $800.
The allowance is currently $640 (which will have been sitting in the account since the end of the previous year) and therefore the expense of increasing it is 800 – 640 = $160.
Because it is an expense, it will be a debit of 160.I do suggest that you watch our free lectures on this (our lectures are a complete course for Paper F3 and cover everything needed to be able to pass the exam well).
I also suggest that you use a different book to the one that contained this question!!
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