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Adjustments to Final Accounts

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Question 81Question →

In the financial records of Folake Commercial Stores for the year ended 31st December 2025, the Trade Debtors balance stood at ₦400,000\text{₦}400,000. Additional information reveals that bad debts of ₦20,000\text{₦}20,000 are to be written off, a provision for doubtful debts is to be created at 5%5\% of net debtors, and a provision for discount on debtors is to be allowed at 2%2\%.

Based on the adjustments above, complete the financial statement summary by filling in the missing figures.

Fill in the blanks below

The provision for discount on debtors created for the year is ₦\text{₦}, and the final net Trade Debtors balance presented in the Balance Sheet is ₦\text{₦}.
Show answer & explanation

Answer

The provision for discount on debtors created for the year is ₦7,220, and the net Trade Debtors balance presented in the Balance Sheet is ₦353,780.
Accounting rules require a strict sequential treatment for adjustments to trade debtors: first write off bad debts, second calculate and deduct the provision for doubtful debts, and third calculate the provision for discount on debtors on the remaining balance. Subtracting bad debts (₦20,000\text{₦}20,000) from gross debtors (₦400,000\text{₦}400,000) gives ₦380,000\text{₦}380,000. Deducting a 5%5\% provision for doubtful debts (₦19,000\text{₦}19,000) leaves ₦361,000\text{₦}361,000. Applying the 2%2\% discount rate to ₦361,000\text{₦}361,000 gives ₦7,220\text{₦}7,220 for the provision for discount on debtors. Finally, deducting ₦7,220\text{₦}7,220 from ₦361,000\text{₦}361,000 results in a net Trade Debtors balance of ₦353,780\text{₦}353,780 in the Balance Sheet.

Step-by-Step Solution

1
Deduct bad debts written off from gross debtors to obtain adjusted debtors
₦400,000−₦20,000=₦380,000\text{₦}400,000 - \text{₦}20,000 = \text{₦}380,000
Bad debts are irrecoverable debts and must be written off from gross debtors before calculating any provisions.
2
Calculate the provision for doubtful debts
5%×₦380,000=₦19,0005\% \times \text{₦}380,000 = \text{₦}19,000
The provision for doubtful debts is computed on the net debtors remaining after deducting bad debts.
3
Determine the remaining debtors base eligible for prompt payment discount
₦380,000−₦19,000=₦361,000\text{₦}380,000 - \text{₦}19,000 = \text{₦}361,000
Cash discount will only be expected from debtors who are expected to pay (excluding bad and doubtful debtors).
4
Compute the provision for discount on debtors
2%×₦361,000=₦7,2202\% \times \text{₦}361,000 = \text{₦}7,220
The provision for discount rate (2%2\%) is applied to the net estimated collectible debtors (₦361,000\text{₦}361,000).
5
Calculate the final net Trade Debtors figure for the Balance Sheet
₦361,000−₦7,220=₦353,780\text{₦}361,000 - \text{₦}7,220 = \text{₦}353,780
Both provisions are subtracted from the adjusted debtors to reflect the realistic cash expected to be realized.

Key Concept

Sequential Order of Adjustments to Debtors
Question 82Question →

A trader extracted a trial balance at 31st December 2025 showing physical stock at cost of N64,000\text{N}64,000. Further inspection revealed that inventory costing N14,000\text{N}14,000 had suffered water damage and could only be sold for N11,000\text{N}11,000 after incurring N2,000\text{N}2,000 in reconditioning expenses. What is the correct figure for closing stock to be credited to the Trading Account?

Show answer & explanation

Answer: N59,000\text{N}59,000

Answer

N59,000\text{N}59,000
Under the prudence accounting convention, inventory is valued at the lower of cost and net realizable value (NRV). The cost of undamaged stock is N50,000\text{N}50,000 (N64,000−N14,000\text{N}64,000 - \text{N}14,000). The damaged stock has a cost of N14,000\text{N}14,000 and an NRV of N9,000\text{N}9,000 (selling price N11,000\text{N}11,000 minus reconditioning costs N2,000\text{N}2,000). Taking the lower value for the damaged stock yields N9,000\text{N}9,000. Combining both gives N50,000+N9,000=N59,000\text{N}50,000 + \text{N}9,000 = \text{N}59,000.

Step-by-Step Solution

1
Calculate Net Realizable Value (NRV) of the damaged inventory
NRV=Expected Selling Price−Reconditioning Costs=N11,000−N2,000=N9,000\text{NRV} = \text{Expected Selling Price} - \text{Reconditioning Costs} = \text{N}11,000 - \text{N}2,000 = \text{N}9,000
According to the prudence concept and inventory accounting rules, Net Realizable Value is defined as estimated selling price less expenses to complete or sell.
2
Determine cost of undamaged inventory
Undamaged Stock Cost=Total Stock Cost−Damaged Stock Cost=N64,000−N14,000=N50,000\text{Undamaged Stock Cost} = \text{Total Stock Cost} - \text{Damaged Stock Cost} = \text{N}64,000 - \text{N}14,000 = \text{N}50,000
Undamaged goods are valued at their cost price since net realizable value exceeds cost.
3
Calculate total valuation of closing inventory
Total Closing Stock=Undamaged Stock+NRV of Damaged Stock=N50,000+N9,000=N59,000\text{Total Closing Stock} = \text{Undamaged Stock} + \text{NRV of Damaged Stock} = \text{N}50,000 + \text{N}9,000 = \text{N}59,000
Closing inventory must be measured at the lower of cost and net realizable value for each item/category.

Key Concept

Valuation of Closing Inventory at the Lower of Cost and Net Realizable Value

Alternative Method

Calculate total stock cost (N64,000\text{N}64,000) and deduct the inventory write-down loss. Inventory Write-down = Cost−NRV=N14,000−(N11,000−N2,000)=N5,000\text{Cost} - \text{NRV} = \text{N}14,000 - (\text{N}11,000 - \text{N}2,000) = \text{N}5,000. Closing stock valuation = N64,000−N5,000=N59,000\text{N}64,000 - \text{N}5,000 = \text{N}59,000.
Estimated Time:1m 30s
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