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Difficulty: MediumCreation and Adjustment of Provision for Doubtful Debts

On 1st January 2024, Chidi Enterprise had an existing Provision for Doubtful Debts of ₦4,000\text{₦}4,000. At 31st December 2024, the business's ledger showed Trade Debtors of ₦110,000\text{₦}110,000. An additional bad debt of ₦10,000\text{₦}10,000 is to be written off before creating a provision for doubtful debts at 5%5\% on remaining trade debtors. What amount will be debited to the Profit and Loss Account as provision for doubtful debts for the year ended 31st December 2024?

  1. A
    ₦5,000\text{₦}5,000
  2. ₦1,000\text{₦}1,000Answer
  3. C
    ₦1,500\text{₦}1,500
  4. D
    ₦5,500\text{₦}5,500

Answer

₦1,000\text{₦}1,000
First, the additional bad debt of ₦10,000\text{₦}10,000 must be written off from trade debtors, leaving net trade debtors of ₦100,000\text{₦}100,000. Calculating 5%5\% on ₦100,000\text{₦}100,000 gives a new required provision of ₦5,000\text{₦}5,000. Since an existing provision of ₦4,000\text{₦}4,000 already exists in the books, only the net increase of ₦1,000\text{₦}1,000 (₦5,000−₦4,000\text{₦}5,000 - \text{₦}4,000) is debited to the Profit and Loss Account.

Step-by-Step Solution

1
Deduct additional bad debts from trade debtors to determine net trade debtors.
Net Trade Debtors = ₦110,000−₦10,000=₦100,000\text{₦}110,000 - \text{₦}10,000 = \text{₦}100,000.
Provision for doubtful debts must only be calculated on good, remaining trade receivables after writing off known bad debts.
2
Calculate the required provision for doubtful debts at year-end.
New Provision Required = 5%×₦100,000=₦5,0005\% \times \text{₦}100,000 = \text{₦}5,000.
The policy requires maintaining a 5%5\% provision on net trade debtors.
3
Determine the net adjustment (increase) to be charged to the Profit and Loss Account.
Increase in Provision = ₦5,000−₦4,000=₦1,000\text{₦}5,000 - \text{₦}4,000 = \text{₦}1,000.
Only the net increase in the provision is debited to the Profit and Loss Account as an expense.

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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