Question 2

A clothing wholesaler is experiencing cash flow problems for several years due to its accounts receivables. Some of the amounts due by debtors are irrecoverable and the company is contemplating creating a provision for doubtful debts.

1. How is a provision for doubtful debts created and maintained? Explain, with figures if necessary, in not more than 200 words. (4 marks)

2. Discuss, in not more than 200 words, the concept or convention on which a provision for doubtful debts is based. (4 marks)

3. Explain, in not more than 300 words the differences between a bad debt and a provision for doubtful debts. (6 marks)

4. The financial year end of the clothing wholesaler is 31 December. You have been provided the following information by the management of the company:

Year	Bad debts written off year to 31 December	Accounts receivable at 31 December after bad debts written off	Percentage allowance for doubtful debts
1	Use any amount between RM2, 000 and RM3, 000	Use any amount between RM50, 000 and RM60, 000	3
2	Use any amount between RM4, 000 and RM4, 900	Use any amount between RM80, 000 and RM85, 000	5
3	Use any amount between RM1, 000 and RM2, 500	Use any amount between RM65, 000 and RM75, 000	2
4	Use any amount between RM2, 800 and RM5, 500	Use any amount between RM90, 000 and RM100, 000	4

Prepare the following:

1. Bad debts accounts for each of the four years. (4 marks)
2. Provision for doubtful debts accounts for each of the four years. (8 marks)
3. The statement of financial position extracts as at 31 December Year 1, Year 2, Year 3 and Year 4. (4 marks)

[Total : 30 Marks]