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Difficulty: HardCreation and Adjustment of Provision for Doubtful Debts

At 31st December 2025, the trial balance of Danjuma Trading Enterprise showed Trade Receivables of ₦160,000\text{₦}160,000 and an existing Provision for Doubtful Debts of ₦6,400\text{₦}6,400.

Additional information:
1. Additional bad debts of ₦10,000\text{₦}10,000 are to be written off.
2. A specific debt of ₦4,000\text{₦}4,000 is identified as doubtful and requires a 100% provision.
3. A general provision for doubtful debts is to be set at 5%5\% of the remaining trade receivables.

What is the net amount (in ₦\text{₦}) to be charged to the Income Statement (Profit and Loss Account) for provision for doubtful debts for the year ended 31st December 2025?

Answer: 4900 ₦

Answer

The net amount to be charged to the Income Statement for provision for doubtful debts is ₦4,900\text{₦}4,900.
To determine the expense charge to the Income Statement, first calculate net receivables after bad debts: ₦160,000−₦10,000=₦150,000\text{₦}160,000 - \text{₦}10,000 = \text{₦}150,000. Subtract the specific doubtful debt of ₦4,000\text{₦}4,000 to get general receivables of ₦146,000\text{₦}146,000. The general provision is 5%×₦146,000=₦7,3005\% \times \text{₦}146,000 = \text{₦}7,300. Adding the specific provision of ₦4,000\text{₦}4,000 gives a total ending provision of ₦11,300\text{₦}11,300. Subtracting the opening provision of ₦6,400\text{₦}6,400 yields a net increase of ₦4,900\text{₦}4,900, which is charged to the Income Statement.

Step-by-Step Solution

1
Calculate adjusted trade receivables after writing off additional bad debts.
Adjusted receivables = ₦160,000−₦10,000=₦150,000\text{₦}160,000 - \text{₦}10,000 = \text{₦}150,000.
Bad debts written off at year-end reduce gross trade receivables before calculating the new provision.
2
Deduct specific doubtful debt to arrive at general trade receivables.
General trade receivables = ₦150,000−₦4,000=₦146,000\text{₦}150,000 - \text{₦}4,000 = \text{₦}146,000.
Specific doubtful debts are provided for separately and excluded before applying the general percentage rate.
3
Calculate total new provision required at the end of the year.
Total provision = ₦4,000 (specific)+(5%×₦146,000)=₦4,000+₦7,300=₦11,300\text{₦}4,000 \text{ (specific)} + (5\% \times \text{₦}146,000) = \text{₦}4,000 + \text{₦}7,300 = \text{₦}11,300.
The closing provision balance consists of both the specific provision and the general provision.
4
Calculate the net increase in provision to be charged as an expense in the Income Statement.
Net increase = ₦11,300−₦6,400=₦4,900\text{₦}11,300 - \text{₦}6,400 = \text{₦}4,900.
Only the difference between the required closing provision and the opening provision balance is recognized in the Income Statement.

Key Concept

Creation and Adjustment of Provision for Doubtful Debts
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Topics

Creation and Adjustment of Provision for Doubtful Debts

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