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Difficulty: MediumAdjustments for Bad Debts and Provision for Doubtful Debts

An extract from the books of a sole trader shows Trade Debtors of ₦150,000₦150,000 and an existing Provision for Doubtful Debts of ₦6,000₦6,000. At the end of the financial year, an additional bad debt of ₦10,000₦10,000 is to be written off, and the provision for doubtful debts is to be adjusted to 5%5\% of the remaining trade debtors. What is the net amount of Trade Debtors to be presented in the Statement of Financial Position (Balance Sheet)?

Answer: 133000 ₦

Answer

The net amount of Trade Debtors to be presented in the Statement of Financial Position is ₦133,000₦133,000.
To compute net trade debtors for the Statement of Financial Position, first subtract the additional bad debt (₦10,000₦10,000) from gross debtors (₦150,000₦150,000) to get remaining debtors of ₦140,000₦140,000. Next, calculate the 5%5\% closing provision on ₦140,000₦140,000, which equals ₦7,000₦7,000. Deducting ₦7,000₦7,000 from ₦140,000₦140,000 yields ₦133,000₦133,000.

Step-by-Step Solution

1
Deduct additional bad debts written off from gross trade debtors
₦150,000−₦10,000=₦140,000₦150,000 - ₦10,000 = ₦140,000
Bad debts identified at the end of the period must be written off from trade debtors before computing the new percentage provision.
2
Calculate the required new provision for doubtful debts
5%×₦140,000=₦7,0005\% \times ₦140,000 = ₦7,000
The required closing provision rate of 5%5\% applies to the remaining collectible trade debtors.
3
Subtract the new provision for doubtful debts from the remaining trade debtors
₦140,000−₦7,000=₦133,000₦140,000 - ₦7,000 = ₦133,000
Net Trade Debtors shown in current assets is calculated as adjusted gross debtors minus the closing provision balance.

Key Concept

Adjustment for bad debts written off prior to calculating closing provision for doubtful debts and net debtors presentation.
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Topics

Adjustments for Bad Debts and Provision for Doubtful Debts

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