AAT Level 4 - Professional Diploma in Accounting Credit and Debt Management Questions and Answers — Questions and Answers
Question 1: A UK business is owed a commercial debt of £1,200 which is now 40 days overdue. Under the Late Payment of Commercial Debts (Interest) Act 1998, what is the total of statutory interest and the fixed compensation sum the business can claim? Assume the Bank of England base rate is 5%.
- £13.15 interest plus £40 compensation
- £14.14 interest plus £70 compensation (Correct answer)
- £9.86 interest plus £70 compensation
- £7.89 interest plus £40 compensation
Correct answer: £14.14 interest plus £70 compensation
Statutory interest is calculated at 8% plus the Bank of England base rate (8% + 5% = 13%). The calculation is: Debt (£1,200) x Interest Rate (13%) / 365 days x Days Overdue (40) = £17.09. The fixed compensation for a debt between £1,000 and £9,999.99 is £70. Therefore, the total claimable is £17.09 in interest and £70 in compensation.
Question 2: A company is experiencing severe financial distress and its directors believe it cannot be rescued as a going concern. They decide to cease trading and close the company in an orderly manner to pay creditors from the sale of assets. Which UK insolvency procedure would the directors voluntarily initiate for this purpose?
- Administration
- Compulsory Liquidation
- Creditors' Voluntary Liquidation (CVL) (Correct answer)
- Members' Voluntary Liquidation (MVL)
Correct answer: Creditors' Voluntary Liquidation (CVL)
A Creditors' Voluntary Liquidation (CVL) is the process initiated by the directors of an insolvent company to voluntarily wind up its affairs and liquidate assets to repay creditors. Administration is primarily a rescue procedure. Compulsory Liquidation is forced by a creditor through the courts. An MVL is for solvent companies.
Question 3: What is the primary difference between invoice factoring and invoice discounting for a UK business seeking to improve its cash flow?
- Factoring is a form of loan, whereas discounting is a sale of the debt.
- Discounting provides a higher percentage of the invoice value upfront.
- In factoring, the provider manages the sales ledger and collects the debt; in discounting, the business retains control of collections. (Correct answer)
- Factoring is only available for domestic sales, while discounting can be used for international trade.
Correct answer: In factoring, the provider manages the sales ledger and collects the debt; in discounting, the business retains control of collections.
The main distinction between the two services is control over the sales ledger and debt collection. With invoice factoring, the finance provider takes over these responsibilities, and the arrangement is usually disclosed to the end customer. With invoice discounting, the business retains control over its sales ledger and chases payments itself, making it a confidential service.
Question 4: A creditor is owed an undisputed debt of £10,000 by a UK limited company. Despite repeated requests for payment, the debt remains unpaid. The creditor wishes to use a formal legal process that serves as a final warning and, if ignored, can be used as evidence of insolvency to petition for the company's closure. Which of the following should be served on the company?
- A County Court Judgment (CCJ)
- A Letter Before Action
- An Attachment of Earnings Order
- A Statutory Demand (Correct answer)
Correct answer: A Statutory Demand
A Statutory Demand is a formal written request for payment of an undisputed debt of over £750. If the debtor company fails to pay or challenge the demand within 21 days, the creditor can use this failure as grounds to present a winding-up petition to the court. A Letter Before Action precedes formal court proceedings, a CCJ is the result of a successful court claim, and an Attachment of Earnings Order is for individuals.
Question 5: Which of the following is a fundamental first step in establishing an effective credit control policy for a business before offering credit terms to a new customer?
- Preparing a cash flow forecast for the next quarter.
- Sending a standardised 'Letter Before Action' template.
- Conducting a thorough credit check using a reputable credit reference agency. (Correct answer)
- Arranging invoice discounting facilities with a finance provider.
Correct answer: Conducting a thorough credit check using a reputable credit reference agency.
Before extending credit, it is crucial to assess the potential customer's creditworthiness to minimise the risk of bad debt. A comprehensive credit check from a recognised agency provides objective information on the customer's financial health and payment history, forming the basis for an informed decision on whether to grant credit and what the limit should be.
Question 6: A UK company has sent several reminders for an overdue invoice of £3,000 to a business customer, with no response. Before it can issue a claim in the County Court, what formal step must the company take in compliance with the Pre-Action Protocol for Debt Claims?
- Report the debt to a credit reference agency.
- Apply for a Third-Party Debt Order.
- Send a formal 'Letter Before Action' giving the debtor a final opportunity to pay. (Correct answer)
- Serve a Statutory Demand on the debtor's registered office.
Correct answer: Send a formal 'Letter Before Action' giving the debtor a final opportunity to pay.
The Civil Procedure Rules require a claimant to send a 'Letter Before Action' (LBA) before commencing court proceedings. This letter sets out the details of the debt and gives the debtor a specified period (typically 14-30 days for businesses) to respond or pay before a court claim is filed. This step is designed to encourage settlement without litigation.
AAT Level 4 - Professional Diploma in Accounting Credit and Debt Management Questions and Answers
A UK business is owed a commercial debt of £1,200 which is now 40 days overdue.
Under the Late Payment of Commercial Debts (Interest) Act 1998, what is the total of statutory interest and the fixed compensation sum the business can claim? Assume the Bank of England base rate is 5%.