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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

Mehta Traders has a debtor, Gopal, who owes Rs 40,000. Gopal has been declared insolvent and is expected to pay only 25 paise in the rupee. Following the convention of conservatism, what loss should Mehta Traders provide for or write off in respect of Gopal?

Rs 30,000 should be provided for. Only 25 paise per rupee, that is Rs 10,000, is expected to be recovered from the insolvent debtor, so the anticipated loss of Rs 30,000 must be recognised immediately under the convention of conservatism.

  1. ARs 10,000
  2. BRs 30,000Correct
  3. CRs 40,000
  4. DNil, until the amount is actually received

Explanation

Expected recovery is 25% of Rs 40,000 = Rs 10,000. The expected loss is Rs 40,000 - Rs 10,000 = Rs 30,000, which conservatism requires to be provided for now. Rs 10,000 is the recovery, not the loss, and waiting for actual non-receipt ignores the anticipated loss.

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