Banking Financial Awareness · Commerce Accountancy

Credit, Debt, and Finance

1,435 Questions

This topic covers essential concepts of credit, debt, and finance including bankruptcy, debt recovery, and financial acts. These questions are frequently asked in banking and IBPS exams. Test your knowledge of financial terminology and loan classifications.

Debt recovery actsBankruptcy filing proceduresFinancial classificationsMedium term financeCredit loss management

Credit, Debt, and Finance Questions

Multiple choice

The stated interest rate on an account is referred to as what? 

  1. Annual Percentage Yield (APY)

  2. Annual Yearly Progress (AYP)

  3. Semi Annual Rate (SAR)

  4. Original Posted Interest (OPI)
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Annual Percentage Yield (APY) is the real rate of return earned on a savings deposit, taking into account the effect of compounding interest over a year.

Multiple choice organization of commerce and management entrepreneurship: an introduction, nature, importance and problems functions and role of an entrepreneur entrepreneurs types of entrepreneurs

Which of the following is not an example of means of finance?

  1. Issue of equity

  2. Goods on credit

  3. Loan against shares

  4. All of these
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation
An entrepreneur should firstly allocate the resources from where he can get finance. It could be loans, self finance, issue of equity, goods on credit, etc. Loans against shares cannot be considered as finance. As he is pledging the shares against a loan 

Multiple choice commercial studies budgeting meaning, merits and demerits of cash flow statement meaning and objectives of cash flow statement statement of changes in financial position

Cash received from debtors _______________.

  1. Sources of funds

  2. Sources of cash

  3. Application of funds

  4. No flow of fund
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

When a cash payment is received from the debtor, cash is increased and the accounts receivable is decreased. When recording the transaction, cash is debited, and accounts receivable are credited.

A debtor is a person, company, or other entity that owes money. In other words, the debtor has a debt or legal obligation to pay the amount owed. So the cash received from debtors is no flow of funds.

Multiple choice book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

Bond call provision that is not practiced even after several years of issuance is classified as ______________.

  1. original provision

  2. deferred call

  3. deferred provision

  4. permanent provision
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

 If the bond is called, investors are paid any accrued interest defined within the provision up to the date of recall. The investor will also receive the return of their invested principal. Also, some debt securities have a freely-callable provision. This option allows them to be called at any time.

Multiple choice book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

Provision for cash discount on debtors is a percentage of _________________.

  1. Debtors

  2. Net debtors

  3. Net debtors less provision for doubtful debts

  4. Net sales
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Discounts allowed to the existing debtors in the next year are debited to the Provision for Discount Account and not to the Profit and loss Account.In other words, the amount of the provision for discount is calculated after deducting bad debts and provision for doubtful debts from sundry debtors.

Multiple choice book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

Which accounting principle is followed in adopting policy of making provision for doubtful debts @5% on debtors ?

  1. Prudence

  2. Substance over from

  3. Materiality

  4. All of these
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The prudence principle is followed in adopting policy of making provision for doubtful debts @5% on debtors. Prudence principle or conservatism principle means all the expenses or possible losses should be recorded in advance, but incomes should not be recorded in advance. 

Multiple choice book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

___________ is a charge against profit.

  1. Liability

  2. Bad debts

  3. Provision

  4. Reserve
Reveal answer Fill a bubble to check yourself
C,D Correct answer
Explanation

Depreciation fund is a reserve, but is a charge against profit since it is created for replacement of an asset. 

Hence, both reserves and provisions can arise as a charge against profits or as an appropriation out of profit, depending upon the nature of provision or reserve.

Multiple choice book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

When R.D.D is created, __________ is credited.

  1. R.D.D A/c

  2. Sales A/c

  3. Bad debts A/c

  4. None of the above
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

R.D.D. means reserves for doubtful debts. 

R.D.D. is created for the anticipated bad debts based on the historical data. The reserve is creating out of profit against which following journal entry will be passed:

Profit & Loss A/c                                      Dr.
   To Reserves for Doubtful Debts.

Multiple choice book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

Provision for Doubtful debts are also called ______________.

  1. Provision for Bad and Doubtful Debts

  2. Provision for Losses

  3. Provision for repayment

  4. None
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Option A is correct. The provision for doubtful debts is the estimated amount of bad debt that will arise from accounts receivable that have been issued but not yet collected. It is not provision for losses because It is for losses that business may occur but it is not confirmed yet. It is doubtful. Also it is not provision for repayment because business has to receive the amount from debtors. Provision for Doubtful debts are also known as Provision for Bad and doubtful debts. 

Multiple choice book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

_________ is created for the possible loss which may arise by non payment of debts by debtors.

  1. Provision for Doubtful Debts

  2. Provision for Discount on Debtors

  3. Bad-debts on debtors

  4. None
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

A provision for doubtful debts is created to cover the loss of possible bad debts by means of a predetermined percentage of net debtors (i.e.., debtors less bad debts) with a view to bring in a certain element of certainty in the amount of bad debts charged for each accounting period.

Multiple choice book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

The entry for creating a provision for bad debts is:

  1. Debit provision for bad debts a/c and Credit debtors a/c.

  2. Debit debtors a/c and Credit provision for bad debts a/c.

  3. Debit provision for bad debts a/c and Credit [profit and loss a/c.

  4. Debit profit and loss a/c and Credit provision for bad debts a/c.
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The provision for doubtful debts is the estimated amount of bad debts that will arise from accounts receivable that have been issued but not yet collected. It is identical to the allowance for doubtful accounts. The provision is used under accrual basis accounting, so that an expense is recognized for probable bad debts as soon as invoices are issued to customers, rather than waiting several months to find out exactly which invoices turned out to be noncollectable.

Journal entry for creating a provision for bad debts is:
      Profit and loss A/c          Dr.
                   To Provisions for bad debts A/c

Multiple choice book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

The provision for bad debts is made by crediting __________.

  1. Profit and loss account

  2. Debtors account

  3. Provision for bad debts account

  4. Trading account
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

The provision for bad debts might refer to the balance sheet account also known as the Allowance for Bad Debts, Allowance for doubtful accounts, or Allowance for Uncollectible Accounts. In this case, the account Provision for Bad Debts is a  contra asset account (an asset account with a credit balance). It is used along with the account Account receivable in order for the balance sheet to report the net realizable value of the accounts receivable.

Provision for bad debts is made by debiting profit and loss A/c and crediting provision for bad debts account.

 

Multiple choice book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

Provision for Discount on Debtors is_______________.

  1. Debited to Sundry Debtors Account

  2. Credited to Sundry Debtors Account

  3. Debited to Bad Debts Account

  4. Debited to Profit & Loss Account
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Provision for discount on debtors is debited to profit and loss account. Provision for depreciation Discount is allowed when our debtors settle our accounts promptly. The amount of discount is an expected loss and has to be recorded in advance.