O Level Accounting (7707)•7707/12/O/N/22

Explanation
Dishonored Cheque Adjustment for Irrecoverable Debt
Steps:
- Initial receipt: Debit Bank, Credit Peter (reduces accounts receivable).
- Cheque returned unpaid: Reverse overstated Bank by crediting it.
- Lack of funds indicates debt irrecoverability: Debit Irrecoverable Debts (expense account) to recognize loss.
- Combined entry corrects Bank and records bad debt without separate receivable reinstatement.
Why D is correct:
- Per accounting standards (e.g., IAS 39/IFRS 9), dishonored cheques due to insufficient funds require reversing the bank credit and charging the loss to bad debts expense directly.
Why the others are wrong:
- A: Debits Bank (worsens overstatement) and credits Irrecoverable Debts (reduces expense incorrectly).
- B: Assumes write-off to Peter but fails to reverse Bank entry, leaving cash overstated.
- C: Reinstate Peter and reverses Bank but ignores recognizing the debt as irrecoverable expense.
Final answer: D
Topic: Other payables and other receivables
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