Examkin

Question

Difficulty: MediumCreation and Adjustment of Provision for Doubtful Debts

At 31st December 2024, the books of Folake Trading Enterprise showed Trade Receivables of ₦120,000\text{₦}120,000 and an existing Provision for Doubtful Debts of ₦4,500\text{₦}4,500. An additional bad debt of ₦8,000\text{₦}8,000 was discovered and is to be written off before creating a 5%5\% provision for doubtful debts on the remaining receivables. What amount (in Naira) should be charged to the Profit and Loss Account as the provision for doubtful debts for the year?

Answer: 1100 ₦

Answer

The amount to be charged to the Profit and Loss Account as an expense for provision for doubtful debts is ₦1,100\text{₦}1,100.
The trade receivables remaining after writing off the additional bad debt of ₦8,000\text{₦}8,000 is ₦112,000\text{₦}112,000. Calculating 5%5\% on ₦112,000\text{₦}112,000 gives a required provision of ₦5,600\text{₦}5,600. Since the existing provision brought forward is ₦4,500\text{₦}4,500, the net adjustment required is an increase of ₦5,600−₦4,500=₦1,100\text{₦}5,600 - \text{₦}4,500 = \text{₦}1,100, which is debited to the Profit and Loss Account.

Step-by-Step Solution

1
Calculate net trade receivables after writing off additional bad debts
\text{₦}120,000 - \text{₦}8,000 = \text{₦}112,000
New bad debts must be deducted from total trade receivables before calculating the new provision percentage.
2
Compute the required closing provision for doubtful debts
5%×₦112,000=₦5,6005\% \times \text{₦}112,000 = \text{₦}5,600
The provision percentage applies to net trade receivables.
3
Determine the increase in provision to be charged as expense
\text{₦}5,600 - \text{₦}4,500 = \text{₦}1,100
Only the difference between the new provision required and the existing provision is charged to the Profit and Loss Account.

Key Concept

Adjustment of Provision for Doubtful Debts with Additional Bad Debts
Rate this question

Topics

Creation and Adjustment of Provision for Doubtful Debts

More questions from this topic