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On 1 July 2010, Union Conglomerate Ltd issued 20,000 8% Debentures at N97.50. The security is redeemable in five years’ time. The interest on the Debentures is payable bi-annually on 30 June and 31 December. On 31 December 2010, the Company’s year-end date, the Debentures were quoted on the Nigerian Stock Exchange for N96.00.
The company accountant has suggested each of the following as possible valuation bases for reporting the Debentures liability on the Balance Sheet as at 31 December 2010:
(i) Face value of the Debentures.
(ii) Face value of the Debenture plus interest payment for five years.
(iii) Market value on the Balance Sheet as at the year end.
Required:
(a) Determine the face value of the Debentures and the proceeds accruing to the company. (2 marks)
(b) Determine the amount and explain the nature of the differences between the face value and the market value of the Debentures on 1 July 2010. (4 marks)
(c) Distinguish between nominal and effective rates of interest. (3 marks)
(d) Determine the nominal interest payable on the Debentures for the year ended 31 December 2010. (2 marks)
(e) State arguments for or against each of the suggested alternatives for reporting the Debentures liability on the Balance Sheet as at 31 December 2010. (4 marks)
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The trial balance of a business shows a trade receivables balance of N90,000. Provision for doubtful debts is 5% of total receivables, while provision for discount on receivables is 2%. The amount to show in the Financial Statements as net trade receivables would be:
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In preparing financial statements, the bad debts account is closed by a transfer to:
A. Statement of financial position
B. Provision for bad debt account
C. Statement of profit or loss
D. Trading account
E. Statement of cash flows
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Which of the following is the effect of a reduction in allowances for doubtful receivables?
A. A reduction in gross profit
B. A reduction in profit for the period
C. A reduction in cash balance
D. Increase in profit for the period
E. Increase in cash balance
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Shade Olu Enterprise had N182,000 allowances for receivables at the beginning of the period. At the end of the year the receivables balance was N2,956,000 and an estimate of doubtful receivables allowance of 5% was made on this amount. What adjustment should be made in the statement of profit or loss?
A. Increase in profit by N34,200
B. A charge of N34,200 to profit or loss
C. A charge of N147,800 to profit or loss
D. Increase in profit by N182,000
E. A charge of N216,200 to profit or loss
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Funke Limited’s management, based on the prudence principle, evaluated its trade receivables accounts over a period of three years ending on December 31 each year. The following were the extracts from the records of the outcome of the evaluation:
| Year | Trade Receivables (₦) | Bad Debts (₦) | Allowance for Doubtful Receivables (%) |
|---|---|---|---|
| 2014 | 654,000 | 24,000 | 2% |
| 2015 | 745,000 | 18,000 | 2% |
| 2016 | 585,000 | 22,000 | 2% |
The value stated for trade receivables was net of the bad debts but before the allowance for bad debts. There was no allowance for bad debt before 2014.
Required: Prepare the ledger accounts for Bad Debts and Allowance for Doubtful Receivables.
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The trial balance of Prudent Limited included the following balances as at October 1, 2015:
| Account | Amount (₦) |
|---|---|
| Trade receivables | 1,564,000 |
| Allowance for doubtful receivables | 78,200 |
During the year to September 30, 2016, Prudent Limited’s credit sales were ₦8,142,000, cash received from customers was ₦7,820,000, and bad debts written off were ₦46,000. Based on experience, Prudent Limited decided to recognize additional allowance of 5% on its receivables as doubtful.
Required:
Prepare the ledgers for:
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The double entry to record cash received in a subsequent year on debt which had been written off as bad in a previous period is
A. Debit trade receivables account, Credit cash account
B. Debit bad and doubtful debts expense account, Credit cash account
C. Debit cash account, Credit bad debt expense account
D. Debit trade receivables account, Credit bad debt expense account
E. Debit cash account, Credit profit or loss account
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What is the net amount of trade receivables recognized in the statement of financial position?
The following is an information extract from the books of accounts of Walling Parking Enterprises, a sole trader:
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On 1 July 2010, Union Conglomerate Ltd issued 20,000 8% Debentures at N97.50. The security is redeemable in five years’ time. The interest on the Debentures is payable bi-annually on 30 June and 31 December. On 31 December 2010, the Company’s year-end date, the Debentures were quoted on the Nigerian Stock Exchange for N96.00.
The company accountant has suggested each of the following as possible valuation bases for reporting the Debentures liability on the Balance Sheet as at 31 December 2010:
(i) Face value of the Debentures.
(ii) Face value of the Debenture plus interest payment for five years.
(iii) Market value on the Balance Sheet as at the year end.
Required:
(a) Determine the face value of the Debentures and the proceeds accruing to the company. (2 marks)
(b) Determine the amount and explain the nature of the differences between the face value and the market value of the Debentures on 1 July 2010. (4 marks)
(c) Distinguish between nominal and effective rates of interest. (3 marks)
(d) Determine the nominal interest payable on the Debentures for the year ended 31 December 2010. (2 marks)
(e) State arguments for or against each of the suggested alternatives for reporting the Debentures liability on the Balance Sheet as at 31 December 2010. (4 marks)
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The trial balance of a business shows a trade receivables balance of N90,000. Provision for doubtful debts is 5% of total receivables, while provision for discount on receivables is 2%. The amount to show in the Financial Statements as net trade receivables would be:
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In preparing financial statements, the bad debts account is closed by a transfer to:
A. Statement of financial position
B. Provision for bad debt account
C. Statement of profit or loss
D. Trading account
E. Statement of cash flows
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Which of the following is the effect of a reduction in allowances for doubtful receivables?
A. A reduction in gross profit
B. A reduction in profit for the period
C. A reduction in cash balance
D. Increase in profit for the period
E. Increase in cash balance
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Shade Olu Enterprise had N182,000 allowances for receivables at the beginning of the period. At the end of the year the receivables balance was N2,956,000 and an estimate of doubtful receivables allowance of 5% was made on this amount. What adjustment should be made in the statement of profit or loss?
A. Increase in profit by N34,200
B. A charge of N34,200 to profit or loss
C. A charge of N147,800 to profit or loss
D. Increase in profit by N182,000
E. A charge of N216,200 to profit or loss
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Funke Limited’s management, based on the prudence principle, evaluated its trade receivables accounts over a period of three years ending on December 31 each year. The following were the extracts from the records of the outcome of the evaluation:
| Year | Trade Receivables (₦) | Bad Debts (₦) | Allowance for Doubtful Receivables (%) |
|---|---|---|---|
| 2014 | 654,000 | 24,000 | 2% |
| 2015 | 745,000 | 18,000 | 2% |
| 2016 | 585,000 | 22,000 | 2% |
The value stated for trade receivables was net of the bad debts but before the allowance for bad debts. There was no allowance for bad debt before 2014.
Required: Prepare the ledger accounts for Bad Debts and Allowance for Doubtful Receivables.
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The trial balance of Prudent Limited included the following balances as at October 1, 2015:
| Account | Amount (₦) |
|---|---|
| Trade receivables | 1,564,000 |
| Allowance for doubtful receivables | 78,200 |
During the year to September 30, 2016, Prudent Limited’s credit sales were ₦8,142,000, cash received from customers was ₦7,820,000, and bad debts written off were ₦46,000. Based on experience, Prudent Limited decided to recognize additional allowance of 5% on its receivables as doubtful.
Required:
Prepare the ledgers for:
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The double entry to record cash received in a subsequent year on debt which had been written off as bad in a previous period is
A. Debit trade receivables account, Credit cash account
B. Debit bad and doubtful debts expense account, Credit cash account
C. Debit cash account, Credit bad debt expense account
D. Debit trade receivables account, Credit bad debt expense account
E. Debit cash account, Credit profit or loss account
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What is the net amount of trade receivables recognized in the statement of financial position?
The following is an information extract from the books of accounts of Walling Parking Enterprises, a sole trader:
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