Examkin

Question

Difficulty: MediumCreation and Adjustment of Provision for Doubtful Debts

At the end of the financial year, a trader's trial balance showed Trade Receivables of ₦85,000\text{₦}85,000 and an existing Provision for Doubtful Debts of ₦2,500\text{₦}2,500. Before preparing final accounts, an additional bad debt of ₦5,000\text{₦}5,000 is to be written off, and the provision for doubtful debts is to be adjusted to 5%5\% of the remaining trade receivables. Calculate the net increase in the provision for doubtful debts (in ₦\text{₦}) to be charged as an expense in the Profit and Loss Account.

Answer: 1500 ₦

Answer

The net increase in the provision for doubtful debts to be charged to the Profit and Loss Account is ₦1,500\text{₦}1,500.
To find the income statement expense, first subtract the additional bad debts written off (₦5,000\text{₦}5,000) from gross trade receivables (₦85,000\text{₦}85,000), yielding net receivables of ₦80,000\text{₦}80,000. Applying the 5%5\% rate yields a required provision of ₦4,000\text{₦}4,000. Subtracting the existing provision balance of ₦2,500\text{₦}2,500 gives a net increase of ₦1,500\text{₦}1,500 to be charged to the Profit and Loss Account.

Step-by-Step Solution

1
Deduct additional bad debts written off from total receivables
Net Trade Receivables = ₦85,000−₦5,000=₦80,000\text{₦}85,000 - \text{₦}5,000 = \text{₦}80,000
Bad debts written off represent confirmed irrecoverable debts and must be deducted prior to estimating the provision for doubtful debts.
2
Calculate the new required provision balance
New Provision = 5%×₦80,000=₦4,0005\% \times \text{₦}80,000 = \text{₦}4,000
The provision percentage is applied to the remaining collectible trade receivables.
3
Determine the net adjustment required for the Profit and Loss Account
Net Increase = ₦4,000−₦2,500=₦1,500\text{₦}4,000 - \text{₦}2,500 = \text{₦}1,500
The Profit and Loss Account only reflects the incremental change between the new provision required and the old provision balance.

Key Concept

Creation and Adjustment of Provision for Doubtful Debts
Rate this question

Topics

Creation and Adjustment of Provision for Doubtful Debts

More questions from this topic