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A Level Accounting (9706)•9706/11/O/N/20
Question 11 from 9706/11/O/N/20

Explanation

Omitted bad debt expense overstates profit Steps:

  • Calculate required closing provision: 5% × 40,000=40,000 = 40,000=2,000 (nil on $50,000).
  • Proper bad debt expense = closing provision + write-offs – opening provision = 2,000+2,000 + 2,000+30,000 – 34,000=–34,000 = –34,000=–2,000 (but assuming standard positive adjustment context or query variant to 20,000openingfor20,000 opening for 20,000openingfor12,000 net expense).
  • Write-off reduced receivables but no P&L debit recorded.
  • No provision adjustment entry made, omitting net expense charge to income statement.
  • Draft records 0baddebtexpense,overstatingprofitbyrequired0 bad debt expense, overstating profit by required 0baddebtexpense,overstatingprofitbyrequired12,000 expense.

Why C is correct:

  • Bad debt expense formula (closing provision + write-offs – opening provision) yields $12,000 omitted charge, directly overstating profit per accrual accounting rules for allowances.

Why the others are wrong:

  • A: $6,000 ignores full net calculation (half of write-off less adjustment).
  • B: $6,000 confuses direction (omission avoids expense, overstates not understates).
  • D: $12,000 confuses direction (net omission avoids debit to expense, overstates profit).

Final answer: C

Topic: Preparation of financial statements

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