If doubtful debts are over-estimated:
A) profit for the following years will be understated.
B) profit over the total life of the business will be understated.
C) profit for following years will be overstated.
D) profit for the current year will be overstated.

Question

Quizplus · Accepted Answer

If doubtful debts are over-estimated, it means that more provision than necessary has been made for bad debts. This leads to an understatement of profit for the current year. However, in the following years, the actual bad debts may be lower than what was estimated, and so less provision will be required. As a result, profit for the following years will be overstated. Therefore, the correct choice is C.

If Doubtful Debts Are Over-Estimated