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Difficulty: HardCreation and Adjustment of Provision for Doubtful Debts

At 31st December 2025, the trial balance of Adebayo Trading Store showed Trade Receivables of ₦180,000\text{₦}180,000 and an existing Provision for Doubtful Debts credit balance of ₦11,000\text{₦}11,000. At year end, an additional bad debt of ₦20,000\text{₦}20,000 is to be written off. A specific provision of ₦10,000\text{₦}10,000 is required for an insolvent debtor, and a general provision of 5%5\% is to be maintained on the remaining trade receivables. What is the net amount to be charged to the Profit and Loss Account as an increase in the provision for doubtful debts for the year?

Answer: 6500 ₦

Answer

The net amount to be charged to the Profit and Loss Account for the increase in provision for doubtful debts is ₦6,500\text{₦}6,500.
To find the correct charge to the Profit and Loss Account, first write off the additional bad debt of ₦20,000\text{₦}20,000 from ₦180,000\text{₦}180,000, giving ₦160,000\text{₦}160,000. Next, set aside the specific provision of ₦10,000\text{₦}10,000, leaving ₦150,000\text{₦}150,000 eligible for the general provision. Computing 5%5\% of ₦150,000\text{₦}150,000 gives ₦7,500\text{₦}7,500. The total provision required is ₦10,000+₦7,500=₦17,500\text{₦}10,000 + \text{₦}7,500 = \text{₦}17,500. Subtracting the existing provision balance of ₦11,000\text{₦}11,000 yields an increase of ₦6,500\text{₦}6,500 to be debited to the Income Statement.

Step-by-Step Solution

1
Deduct additional bad debts written off at year end from gross trade receivables.
Adjusted Trade Receivables = ₦180,000−₦20,000=₦160,000\text{₦}180,000 - \text{₦}20,000 = \text{₦}160,000.
Bad debts written off reduce the total recoverable debts before provisions are calculated.
2
Deduct the specific provision target from adjusted trade receivables to isolate receivables for general provision.
Receivables subject to general provision = ₦160,000−₦10,000=₦150,000\text{₦}160,000 - \text{₦}10,000 = \text{₦}150,000.
Specific provisions cover identifiable bad debts, so the general percentage applies only to the remainder.
3
Calculate the total required provision for doubtful debts at year end.
General Provision = 5%×₦150,000=₦7,5005\% \times \text{₦}150,000 = \text{₦}7,500. Total New Provision = ₦10,000+₦7,500=₦17,500\text{₦}10,000 + \text{₦}7,500 = \text{₦}17,500.
The total provision required combines both specific and general estimates of uncollectible debts.
4
Calculate the net change (increase) in provision to be charged to the Profit and Loss Account.
Charge to Profit and Loss Account = ₦17,500−₦11,000=₦6,500\text{₦}17,500 - \text{₦}11,000 = \text{₦}6,500.
Only the increment in provision above the existing balance represents an additional expense for the current period.

Key Concept

Calculation of Net Increase in Provision for Doubtful Debts with Specific and General Adjustments
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Topics

Creation and Adjustment of Provision for Doubtful Debts

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