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Difficulty: MediumCreation and Adjustment of Provision for Doubtful Debts

On 31st December 2025, a business trial balance showed Trade Debtors of ₦52,000\text{₦}52,000 and an existing Provision for Doubtful Debts of ₦1,800\text{₦}1,800. Before preparing final accounts, an additional bad debt of ₦2,000\text{₦}2,000 is written off, and the provision for doubtful debts is to be adjusted to 5%5\% of the remaining trade debtors. What amount will be charged to the Profit and Loss Account for the provision for doubtful debts?

  1. ₦700Answer
  2. B
    ₦2,500
  3. C
    ₦800
  4. D
    ₦2,600

Answer

₦700
The correct charge to the Profit and Loss Account is ₦700. First, the additional bad debt of ₦2,000 must be deducted from the gross trade debtors of ₦52,000 to leave net debtors of ₦50,000. Calculating 5% on ₦50,000 gives a new provision balance of ₦2,500. Since an existing provision of ₦1,800 is already in place, only the increase of ₦700 (₦2,500 - ₦1,800) is recognized as an expense in the Profit and Loss Account.

Step-by-Step Solution

1
Deduct additional bad debts from gross trade debtors to obtain net debtors.
Net Debtors=₦52,000−₦2,000=₦50,000\text{Net Debtors} = \text{₦}52,000 - \text{₦}2,000 = \text{₦}50,000
Provision for doubtful debts is calculated only on receivables after all bad debts have been written off.
2
Calculate the required new provision for doubtful debts.
New Provision=5%×₦50,000=₦2,500\text{New Provision} = 5\% \times \text{₦}50,000 = \text{₦}2,500
The policy requires creating a 5% reserve on remaining collectable receivables.
3
Calculate the net increase in provision to be charged to Profit and Loss.
\text{Charge to P&L} = \text{₦}2,500 - \text{₦}1,800 = \text{₦}700
Only the incremental increase in provision represents an expense for the current accounting period.

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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