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Difficulty: MediumCreation and Adjustment of Provision for Doubtful Debts

At 31st December 2025, the trial balance of Zainab Stores showed Trade Debtors of ₦200,000\text{₦}200,000 and an existing Provision for Doubtful Debts of ₦8,000\text{₦}8,000. An additional bad debt of ₦20,000\text{₦}20,000 is to be written off, and the provision for doubtful debts is to be maintained at 5%5\% of the remaining trade debtors. What is the amount to be charged to the Profit and Loss Account for the provision for doubtful debts?

  1. ₦1,000\text{₦}1,000Answer
  2. B
    ₦9,000\text{₦}9,000
  3. C
    ₦2,000\text{₦}2,000
  4. D
    ₦10,000\text{₦}10,000

Answer

₦1,000\text{₦}1,000
The net trade debtors after writing off the additional bad debt of ₦20,000\text{₦}20,000 are ₦180,000\text{₦}180,000. The required provision is 5%5\% of ₦180,000=₦9,000\text{₦}180,000 = \text{₦}9,000. Comparing this with the existing provision of ₦8,000\text{₦}8,000 gives an increase of ₦1,000\text{₦}1,000, which is the exact amount charged to the Profit and Loss Account.

Step-by-Step Solution

1
Calculate remaining trade debtors after writing off the additional bad debt
₦200,000−₦20,000=₦180,000\text{₦}200,000 - \text{₦}20,000 = \text{₦}180,000
Provision for doubtful debts is calculated only on surviving receivables after all confirmed irrecoverable debts are written off.
2
Calculate the required new provision for doubtful debts
5%×₦180,000=₦9,0005\% \times \text{₦}180,000 = \text{₦}9,000$
The provision represents the estimated percentage of remaining debtors that may default.
3
Determine the net adjustment for the Profit and Loss Account
\text{₦}9,000 \text{ (New Provision)} - \text{₦}8,000 \text{ (Existing Provision)} = \text{₦}1,000
Only the increase in provision is charged as an expense to the Profit and Loss Account for the period.

Key Concept

Adjustment of Provision for Doubtful Debts
Estimated Time:1m 30s
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Topics

Creation and Adjustment of Provision for Doubtful Debts

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