problem 1) Part A
Warwick Motors is a garage and carries out car repairs. Many of the customers have outstanding accounts and are normally given 30 days credit. Bill Rogers, the owner of the business, wishes to recognise the risk involved as bad debts are unfortunately a common occurrence. On 31 May 2006, the end-of-year for Warwick Motors, the total amount of money owed by credit customers was Rs 125,000.
At the end of the trading year, Bill decided to introduce provision for doubtful debts. His approach was to make a general provision equal to 3 per cent of total debtors.
(a) Suggest a reason why Bill Rogers would make the general provision for doubtful debts rather than specific provision.
(b) Compute the provision for doubtful debts for Warwick Motors.
(c) Demonstrate the book keeping entries required to provide for doubtful debts.
(d) What effect will the doubtful debt provision have on profit for Warwick Motors?
On examining the books of Exports Co., you ascertain that on 1 October 2005 the receivables ledger balances were Rs 8,024 debit and Rs 57 credit, and the payables ledger balances on the same date stood at Rs 6,235 credit and Rs 105 debit.
For the year ended 30 September 2006 the following particulars are available:
Cash from trade accounts receivable 55,212
Cash to trade accounts payable 37,307
Discount received 1,475
Discount allowed 2,328
Returns inwards 1,002
Return outwards 535
Bad debts written off 326
Cash received in respect of debit balances in payables ledger 105
Following information is also available:
• Amount due from customer as shown by receivables ledger, offset against amount due to the same firm as shown by payables ledger (settlement by contra) Rs 434
• Allowances to customers on goods damaged in transit Rs 212
• All sales and purchases were affected on credit.
On 30 September 2006 there were no credit balances in the receivables ledger except those outstanding on 1 October 2005, and no debit balances in the payables ledger.
(i) prepare up the following accounts to record above transactions and bring down the balances as at 30 September 2006:
(a) Receivables control account.
(b) Payables control account.
(ii) Briefly describe reasons for preparing control accounts.