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Difficulty: EasyCreation and Adjustment of Provision for Doubtful Debts

At the end of the financial year, Kalu Traders has Trade Debtors of ₦75,000\text{₦}75,000 and an existing Provision for Doubtful Debts of ₦1,500\text{₦}1,500. If bad debts of ₦5,000\text{₦}5,000 are written off and the provision for doubtful debts is to be adjusted to 5%5\% of the remaining debtors, what amount (in ₦\text{₦}) will be charged to the Profit and Loss Account for provision for doubtful debts?

Answer: 2000 ₦

Answer

The amount to be charged to the Profit and Loss Account for provision for doubtful debts is ₦2,000\text{₦}2,000.
The net trade debtors figure after writing off bad debts is ₦70,000\text{₦}70,000 (₦75,000−₦5,000\text{₦}75,000 - \text{₦}5,000). The new provision required is 5%5\% of ₦70,000=₦3,500\text{₦}70,000 = \text{₦}3,500. Subtracting the existing provision balance of ₦1,500\text{₦}1,500 gives an increase of ₦2,000\text{₦}2,000, which is debited as an expense in the Profit and Loss Account.

Step-by-Step Solution

1
Deduct bad debts written off from total trade debtors
Net Trade Debtors = ₦75,000−₦5,000=₦70,000\text{₦}75,000 - \text{₦}5,000 = \text{₦}70,000
Provision for doubtful debts is calculated on net trade debtors after deducting bad debts written off.
2
Calculate the new required provision for doubtful debts
New Provision = 5%×₦70,000=₦3,5005\% \times \text{₦}70,000 = \text{₦}3,500
The required percentage is applied to the remaining trade debtors figure.
3
Calculate the adjustment amount for the Profit and Loss Account
Profit and Loss Charge = ₦3,500−₦1,500=₦2,000\text{₦}3,500 - \text{₦}1,500 = \text{₦}2,000
Only the net increase in provision is charged as an expense to the Profit and Loss Account.

Key Concept

Adjustment of Provision for Doubtful Debts
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Topics

Creation and Adjustment of Provision for Doubtful Debts

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