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Difficulty: Very hardCreation and Adjustment of Provision for Doubtful Debts

On 31st December 2025, Folake Enterprises extracted a trial balance showing Trade Receivables of ��145,000\text{��}145,000 and an existing Provision for Doubtful Debts of ₦4,800\text{₦}4,800. During the year-end audit, it was discovered that a bad debt recovery of ₦2,500\text{₦}2,500 was erroneously credited to the Trade Receivables account. Additionally, further bad debts of ₦5,000\text{₦}5,000 are to be written off. A specific provision of ₦4,000\text{₦}4,000 is required for a customer in liquidation, while a general provision of 5%5\% is to be maintained on the remaining trade receivables. Calculate the net amount in Naira (₦\text{₦}) to be charged as Provision for Doubtful Debts in the Income Statement for the year ended 31st December 2025.

Answer: 6125 ₦

Answer

The net amount to be charged as Provision for Doubtful Debts in the Income Statement for the year ended 31st December 2025 is ₦6,125\text{₦}6,125.
The net amount charged to the Income Statement is ₦6,125\text{₦}6,125. Trade receivables are first corrected for the misposted bad debt recovery (₦145,000+₦2,500=₦147,500\text{₦}145,000 + \text{₦}2,500 = \text{₦}147,500), then reduced by additional bad debts (₦147,500−₦5,000=₦142,500\text{₦}147,500 - \text{₦}5,000 = \text{₦}142,500). Deducting the specific provision of ₦4,000\text{₦}4,000 leaves ₦138,500\text{₦}138,500, yielding a 5%5\% general provision of ₦6,925\text{₦}6,925. The total required provision of ₦10,925\text{₦}10,925 (₦4,000+₦6,925\text{₦}4,000 + \text{₦}6,925) minus the opening provision of ₦4,800\text{₦}4,800 gives a net charge of ₦6,125\text{₦}6,125.

Step-by-Step Solution

1
Adjust trade receivables balance to correct the ledger entry error.
Corrected Trade Receivables = ₦147,500\text{₦}147,500 (i.e., ₦145,000+₦2,500\text{₦}145,000 + \text{₦}2,500).
Crediting the bad debt recovery directly to trade receivables was an error that incorrectly reduced the receivables balance; adding it back restores the true gross receivables balance before adjustments.
2
Deduct additional bad debts written off at year-end.
Adjusted Trade Receivables = ₦142,500\text{₦}142,500 (i.e., ₦147,500−₦5,000\text{₦}147,500 - \text{₦}5,000).
Irrecoverable debts must be completely written off from gross receivables before estimating provisions.
3
Calculate the total new provision for doubtful debts (specific + general).
Total New Provision Required = ₦10,925\text{₦}10,925 (Specific: ₦4,000\text{₦}4,000; General: 5%×₦138,500=₦6,9255\% \times \text{₦}138,500 = \text{₦}6,925).
The specific provision of ₦4,000\text{₦}4,000 is isolated first, leaving ₦138,500\text{₦}138,500 (₦142,500−₦4,000\text{₦}142,500 - \text{₦}4,000) on which the general rate of 5%5\% is calculated.
4
Determine the net adjustment amount to be charged to the Income Statement.
Income Statement Charge = ₦6,125\text{₦}6,125 (i.e., ₦10,925−₦4,800\text{₦}10,925 - \text{₦}4,800).
The Income Statement only reflects the increase in provision required from the existing balance of ₦4,800\text{₦}4,800 to the new target balance of ₦10,925\text{₦}10,925.

Key Concept

Auditing adjustments to trade receivables and multi-tier calculation of specific and general provisions for doubtful debts
Estimated Time:3m 0s
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Topics

Creation and Adjustment of Provision for Doubtful Debts

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