O-LevelAccountingAccounting procedures7707/21 · Oct/Nov 2013 · Q226 Marks

Raja supplied the following information relating to her trade receivables before the preparation of the income statement for the year ended 31 May 2013. 1 Trade receivables Provision for doubtful debts 31 May 2012 $18800 940 31 May 2013 $19200 ? 2 The following accounts are to be written off as bad debts. R B Brown L Wong P Singh $502 90 288 3 The provision for doubtful debts is maintained at 5% of trade receivables. REQUIRED Raja is concerned that her profits have been falling and wishes to stop charging the provision for doubtful debts in her income statement. REQUIRED The information below relates to an employee of Raja for the month of May 2013. Hours worked 140 10 Rates of pay $8 per hour Time and half Tax and social security deductions Employee rate 20% of gross pay Employer rate 10% of gross pay REQUIRED

(a)Prepare the provision for doubtful debts account for the year ended 31 May 2013. Balance the account and bring the balance down on 1 June 2013. Provision for Doubtful Debts account[6]
(b)Indicate with a tick (✓) the effect a reduction in the provision for doubtful debts would have on the following: Gross profit Profit for the year Trade receivables Increase Decrease No effect[3]
(c)Advise Raja on whether she should continue to maintain a provision for doubtful debts. Give reasons for your answer.[9]
(d)Calculate the employee's net pay for May 2013.[5]
(e)Calculate the total amount Raja owes the tax and social security authorities for May 2013.[3]

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2013). The mark or mark type is shown in brackets.

[1] (a) Balance b/d 940
[2] (a) Income statement 24
[1] (a) Balance c/d 916
[1] (a) Balance b/d 916 (of)
[1] (b) Gross profit: No effect
[1] (b) Profit for the year: Increase
[1] (b) Trade receivables: No effect
[2] (c) Raja should continue to maintain a provision for doubtful debts.
[2] (c) Concept: The matching/accruals concept
[3] (c) Reason: Requires expenses of a period to be set against the revenues for that period.
[3] (c) In the case of bad debts the amount written off in a period may relate to sales from another period.
[3] (c) There is a time lag between sales and finding out that a debt is bad. If this overlaps two accounting periods then this breaks the matching concept.
[2] (c) Concept: The prudence concept OR conservatism
[3] (c) Reason: Expenses may only be estimated so a provision is made as a matter of prudence.
[2] (c) This is consistent with the principle of conservatism.
[3] (c) The conservatism concept requires that monies from customers unlikely to be paid should not be shown as trade receivables in the statement of financial position/balance sheet.
[9] (c) Allow any reasonable answer centred on matching and prudence/conservatism principles. Max 9
[1] (d) 140 hours x $8 per hour = 1120
[1] (d) 10 hours x $12 per hour = 120
[1] (d) Gross pay = 1240 (of)
[1] (d) Less 20% tax and social security = (248)
[1] (d) Net pay = 992 (of)
[1] (e) Employer's tax and social security payments = $124
[2] (e) Employee's tax and social security deductions = $248
[1] (e) Total owed = $372 (of)

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