EPFO EO/AO 2023 General Ability Test · Question 77 of 120

Correct — D, (d) ₹ 33,000. The stem ends 'will be:' with no space before the colon, as printed, and the trial-balance extract is a three-row table whose two money columns carry no headings: the first is the debit column and the second the credit column. Trade receivables ₹ 2,50,000 and discount to debtors ₹ 4,000 stand on the debit side; provision for discount to debtors ₹ 14,000 stands on the credit side, which is what tells you it is the provision brought forward from last year and not this year's charge. The working has three steps. Step 1 — bring the further discount into the books. The ₹ 20,000 of additional discount allowed during the year has not yet been recorded, so it must be. Discount allowed is debited and trade receivables are credited, which reduces the debtors to ₹ 2,50,000 − ₹ 20,000 = ₹ 2,30,000. The total discount allowed for the year is now ₹ 4,000 + ₹ 20,000 = ₹ 24,000. Step 2 — compute the provision the policy requires. The firm keeps a provision for discount to debtors equal to 10 per cent of the trade receivables balance, and the balance after step 1 is ₹ 2,30,000. So the provision required at 31.03.2022 is ₹ 23,000. It has to be 10 per cent of the closing figure, because a discount can only be given on a debt that is still outstanding — a debtor who has already taken his discount is no longer there to take another. Step 3 — charge the profit and loss account. Two things go to it: the discount actually allowed during the year, ₹ 24,000, and the movement in the provision, which is ₹ 23,000 required less ₹ 14,000 already standing, an increase of ₹ 9,000. Total ₹ 24,000 + ₹ 9,000 = ₹ 33,000. The same figure falls out of the Provision for Discount on Debtors account as a balancing figure. Credit side: opening balance ₹ 14,000, plus the amount charged to profit and loss. Debit side: discount allowed during the year ₹ 24,000, plus the closing balance carried down ₹ 23,000. For the account to balance, the profit and loss charge must be 24,000 + 23,000 − 14,000 = ₹ 33,000. Two independent presentations giving the same number is the check worth doing on every adjustment question of this kind.

• (a)₹ 25,000 — This is 10 per cent of ₹ 2,50,000 — the provision worked out on the trade receivables as they stand in the trial balance, before the further ₹ 20,000 of discount is deducted, and then offered on its own as the answer. It is wrong twice. The provision must be computed on ₹ 2,30,000, because the additional discount reduces the debtors; and even a correctly computed provision is not the charge to the profit and loss account, which also has to carry the discount actually allowed and to give credit for the provision already standing.
• (b)₹ 13,000 — This is ₹ 4,000 plus ₹ 9,000 — the discount that already appears in the trial balance, plus the increase in the provision — with the ₹ 20,000 of additional discount left out of the profit and loss charge. Interestingly it uses the right provision figure of ₹ 23,000, so the candidate has remembered to reduce the debtors by the further discount when computing the provision and then forgotten to charge that same discount as an expense. The ₹ 20,000 does two jobs and both of them have to be done.
• (c)₹ 9,000 — This is the movement in the provision alone: ₹ 23,000 required less ₹ 14,000 brought forward. It answers a question the stem did not ask. The stem asks for the total amount to be charged 'for discount allowed and provision for discount created', which is two elements, and this option supplies only the second. A candidate who has done all the hard arithmetic correctly can still lose the mark here by stopping one line early — which is why it is worth re-reading what the stem asks for after the working is finished.

A provision for discount on debtors anticipates the cash discounts that customers who owe money at the year end will take when they pay early in the following year. It is an application of the same prudence that produces the provision for doubtful debts: the sale has been recognised in full, but part of what is owed will never be collected because it will be surrendered as a discount, so the expected loss is charged in the year of the sale rather than the year of the payment. Because a discount can only be taken by a debtor who is still owing, the provision is computed on the debtors figure after every year-end adjustment has been made — after further bad debts are written off, after further discounts are allowed, and in the fuller version of the exercise after the provision for doubtful debts has been deducted, since a debtor written off as doubtful will never take a discount either. The charge to the profit and loss account in any year is then the discount actually allowed during the year plus the closing provision less the opening provision, which is simply the balancing figure of the provision account. The order of operations is what candidates lose marks on: adjust the debtors first, then provide, then charge.

This is a figure question and it carries a table, one of only two in the paper. Everything the table holds has been reproduced in the stem's text, so the arithmetic is all that is being tested; what makes it a real question is that the trial-balance columns are unlabelled, so a candidate has to know that a provision carries a credit balance and that discount allowed is a debit. EPFO's accountancy block is written for candidates who will audit and check accounts, and this is the shape it prefers: a small extract, one adjustment, and an answer that requires three steps in the right order.

• In a trial balance, trade receivables and discount allowed carry debit balances; a provision for discount to debtors carries a credit balance and is the provision brought forward.
• Further discount allowed but unrecorded must first be entered: debit discount allowed, credit trade receivables, so debtors fall from ₹ 2,50,000 to ₹ 2,30,000.
• The provision is computed on the ADJUSTED debtors figure — 10 per cent of ₹ 2,30,000 = ₹ 23,000 — because only a debtor still owing can take a discount.
• Total discount allowed for the year = ₹ 4,000 already recorded + ₹ 20,000 additional = ₹ 24,000.
• Charge to profit and loss = discount allowed for the year + closing provision − opening provision = 24,000 + 23,000 − 14,000 = ₹ 33,000.
• Equivalently, charge = discount allowed ₹ 24,000 + increase in provision ₹ 9,000 = ₹ 33,000.
• In the Provision for Discount on Debtors account the profit and loss figure is the balancing figure: debits of ₹ 24,000 and ₹ 23,000 against a credit opening balance of ₹ 14,000.
• In the fuller textbook version, the provision for discount on debtors is computed on debtors net of the provision for doubtful debts, since a doubtful debtor will not take a discount either.

• Computing the provision on the trial-balance debtors of ₹ 2,50,000 instead of on ₹ 2,30,000 after the further discount.
• Charging only the movement in the provision and forgetting the discount actually allowed — the ₹ 9,000 answer.
• Using the additional ₹ 20,000 to reduce debtors but forgetting to charge it as an expense — the ₹ 13,000 answer.
• Misreading the unlabelled money columns. The ₹ 14,000 stands in the credit column, so it is the existing provision, not a charge for the year.

The EO/AO accountancy block sets one or two adjustment questions each sitting, built on a three or four line extract and a single unrecorded item. They are always answerable by preparing the relevant provision account in the margin and taking the balancing figure, which is both faster and safer than trying to reason the charge out in words.

No directly related past PYQ was found.

• practice — not a real PYQ

  The provision for discount on debtors is calculated on :

  • (a)Total debtors as per the trial balance
  • (b)Debtors after deducting further bad debts and the provision for doubtful debts
  • (c)Total sales for the year
  • (d)Credit sales for the year less cash received

  Answer(b) Debtors after deducting further bad debts and the provision for doubtful debts

• practice — not a real PYQ

  The opening provision for discount on debtors is ₹ 6,000, discount allowed during the year is ₹ 9,000 and the provision required at the year end is ₹ 8,000. The amount to be charged to the Profit and Loss Account is :

  • (a)₹ 8,000
  • (b)₹ 9,000
  • (c)₹ 11,000
  • (d)₹ 23,000

  Answer(c) ₹ 11,000