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Accounting: Recording Provisions for Doubtful Debts

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Accounting: Recording Provisions for Doubtful Debts

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Questions and Answers

What type of activities may involve borrowing against long-term assets or investments?

Short-term financing

Long-term financing (correct)

Investment strategies

Cash flow management

What is the primary objective of borrowing against long-term assets or investments?

To generate profit

To increase liquidity (correct)

To meet short-term obligations

To reduce risk

In the financial statements of a Life Insurance Company, where are unrealized gains or losses due to changes in fair value of listed equity and derivatives instruments recorded?

Fair Value Change Account (correct)

Profit or Loss Account

Miscellaneous Expenses

Balance Sheet

What is the treatment of unrealized gains or losses due to changes in fair value of listed equity and derivatives instruments in the financial statements of a Life Insurance Company?

Transferred to equity under the head ‘Fair Value Change Account’ Signup and view all the answers

Which account is credited when provisions for doubtful debts are recorded?

Provision for doubtful debts account Signup and view all the answers

Why are unrealized gains or losses due to changes in fair value of listed equity and derivatives instruments not recognized in profit or loss in the financial statements of a Life Insurance Company?

To avoid volatility in profit or loss Signup and view all the answers

What is the purpose of provisioning for doubtful debts?

To set aside funds for potential bad debts Signup and view all the answers

What is the formula to calculate NAV of a mutual fund?

Assets - Liabilities / Number of outstanding units Signup and view all the answers

Which of the following is not applicable to IFRS 4?

Financial assets within the scope of IAS 39 Signup and view all the answers

What type of transactions results in the flow of funds?

Transactions between Current Assets and Long-term liabilities and capital Signup and view all the answers

Which of the following is a consequence of provisioning for doubtful debts?

Decrease in profit Signup and view all the answers

What is the purpose of IFRS 4?

To regulate insurance contracts Signup and view all the answers

What is the effect of provisioning for doubtful debts on the balance sheet?

Decrease in current assets Signup and view all the answers

Study Notes

Accounting for Provisions for Doubtful Debts

Provisions for Doubtful Debts are recorded by debiting the Profit and Loss Account and crediting the Provision for Doubtful Debts Account.
This recognizes the expense and sets aside funds for potential bad debts.

Calculating NAV of a Mutual Fund

NAV (Net Asset Value) is calculated by subtracting liabilities from assets and dividing by the number of outstanding units.
Example: (Assets - Liabilities) / Number of units = NAV.

IFRS 4 Application

IFRS 4 applies to Insurance contracts issued by an entity and Reinsurance contracts held by an entity.
It does not apply to financial assets within the scope of IAS 39.

Flow of Funds

Transactions between Current Assets and Long-term liabilities and capital can result in the flow of funds.
Examples include borrowing against long-term assets or investments.

Treatment of Unrealized Gains or Losses

Unrealized gains or losses due to changes in fair value of listed equity and derivatives instruments are transferred to equity under the head ‘Fair Value Change Account’ in the financial statements of a Life Insurance Company.
They are not deferred under the head miscellaneous expenses or recognized in profit or loss.

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Description

Identify the correct accounting entry to record 'Provisions for Doubtful Debts'. Learn how to accurately record financial transactions in your accounting practice.