Mateo, a small trader, has a policy to maintain a provision for doubtful debts at a fixed percentage rate on trade receivables at the end of each financial year.

(a) What is the purpose of creating a provision for doubtful debts account? (2 marks)

(b) State and explain two accounting principles(concepts) which are applied when a business maintaining a provision for doubtful debts account. (4 marks)

(c) State two factors that s business should consider when setting a rate for provision for doubtful debts. (4 marks)

Additional information

A provision for doubtful debts account is maintained. This had a balance of $2058 on 1 July 2020.

At 30 June 2021, total trade receivables were $38 790. This total included the accounts of the following credit customers which have been overdue for almost a year. Mateo had decided to write off these accounts as irrecoverable debts:

Britney $1040

Carlos $850

Wilson $1200

Mateo decided to maintain a provision for doubtful debts of 5% on the remaining trade receivables.

(b) Prepare the Irrecoverable Debts Account for the year ended 30 June 2021. (4 marks)

(c) Prepare the Provision For Doubtful Debts Account for the year ended 30 June 2021.

(6 marks)

(d) (i) Prepare an extract for the Income Statement for the year ended 30 June 2021. (2 marks)

(ii) Prepare the relevant extract from the Statement of Financial Position as at 30 June 2021. (3 marks)

[Total: 25 marks]