Answers to bad debt provision exercises.pdf - NDLR Dspace

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Extract from Trial Balance of A Hill at 31 Dec 2005
Dr Cr
Debtors 20,000
Bad debts written off 230
Required:
(i) the relevant entries in the P&L for y/e 31 Dec 07
(ii) the relevant entries in the Bal Sheet @ 31 Dec 07
There is no additional information in this question, so you do not have to change
any of the figures in the TB.
P&L a/c
Expenses:
Bad debts written off (230)
Balance Sheet
Current Assets
Debtors 20,000
Extract from Trial Balance of A Hill at 31 Dec 2006
Dr Cr
Debtors 35,000
Bad debts written off 450
Additional information:
a) A Hill has been informed that debtors include a bad debt of €300
This is telling us that the amounts in the Trial Balance are incorrect, and that they need
to be changed. Reduce debtors by 300, and increase bad debts written off by 300
Required:
(i) the relevant entries in the P&L for y/e 31 Dec 07
(ii) the relevant entries in the Bal Sheet @ 31 Dec 07
There is additional information in this question, so we do have to change
debtors and bad debts written off.
P&L a/c
Expenses:
Bad debts written off (450 + 300) (750)
Balance Sheet
Current Assets
Debtors (35,000 ‐ 300) 34,700

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Extract from Trial Balance of A Hill at 31 Dec 2007
Dr Cr
Debtors 60,000
Bad debts (written off) 1,250
Additional information:
a) Debtors include a certain bad debt of €800
b) Due to the recession A Hill fears that more of his remaining debtors will not pay their
outstanding debts. He wants to create a provision for bad debts equal to 10% of debtors
Required:
(i) the relevant entries in the P&L for y/e 31 Dec 07
(ii) the relevant entries in the Bal Sheet @ 31 Dec 07
Step 1 ‐ change the amounts in the TB (reduce debtors by 800, increase bad debts by 800)
Debtors are now 59,200, bad debts are now 2,050
Step 2 ‐ create the new bad debt provision 10% of debtors
10% * 59,200 = 5,920 is the new provision for bad debts
Rule for Bad Debt Provisions
P&L ‐ an increase in a provision is an expense in the P&L
a reduction in a provision is treated as income in the P&L
B Sheet ‐ Reduce debtors by the new provision for bad debts
Because it is the first year he created a bad debt provision, it has increased from zero
to 5,920. Therefore, we need to show an expense for this increase.
P&L a/c
Expenses: two expenses
Bad debts written off (1,250 + 800) (2,050) in the P&L for this
Increase in provision for bad debts (5,920 ‐ 0) (5,920) example
Balance Sheet
Current Assets
Debtors (60,000 ‐ 800) 59,200 prov for bad debts
less provision for bad debts (5,920) reduces debtors

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Extract from Trial Balance of A Hill at 31 Dec 2008
Dr Cr
Debtors 80,000
Provision for bad debts 5,920
Bad debts written off 4,000
Additional information:
old prov
for bad
a) Update the bad debt provision so that is 10% of debtors. debts
Required: it is going
(i) the relevant entries in the P&L for y/e 31 Dec 08 to increased by
(ii) the relevant entries in the Bal Sheet @ 31 Dec 08 2,080 to 8,000
Step 1 ‐ Update the bad debt provision to 10% of debtors
80,000 * 10% = 8,000 is the new provision. Debtors will be reduced by 8,000 in the B Sheet
has the provision increased or decreased? New Prov = 8,000. Old Prov = 5,920
Prov has increased by 2,080 (8000‐5920) The increase is shown as an expense in P&L
P&L a/c
Expenses: two expenses
Bad debts written off (4,000) in the P&L for this
Increase in provision for bad debts (8,000 ‐ 5,920) (2,080) example
Balance Sheet
Current Assets
Debtors 80,000 prov for bad debts
less provision for bad debts (8,000) reduces debtors

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Extract from Trial Balance of A Hill at 31 Dec 2009
Dr Cr
Debtors 47,000
Provision for bad debts 8,000 this is the
Bad debts written off 1,200 old prov
for bad debts
Additional information: We are going to
a) Debtors include a certain bad debt of €850 reduce it by
b) Update the bad debt provision so that is 8% of debtors 4,308 to 3,692
Required:
(i) the relevant entries in the P&L for y/e 31 Dec 09
(ii) the relevant entries in the Bal Sheet @ 31 Dec 09
Step 1 ‐ Adjust debtors & bad debts written off for the extra bad debt of 850
Debtors = 46,150, Bad debts = 2050
Step 2 ‐ Update the bad debt provision to 8% of debtors
46,150 * 8% = 3,692 New bad debt prov = 3,692.
Debtors should be reduced by 3,692 in the Bal Sheet.
Is it an increase or a decrease in the provision?
New Prov 3,692
Old Prov 8,000 (see Trial Balance)
Decrease of 4,308
Rule: a decrease in a bad debt provision is treated as income in the P&L a/c
P&L a/c
Add other income:
decrease in provision for bad debts (3,692 ‐ 8,000) +4308 income
Expenses:
Bad debts written off (1,200 + 850) (2,050) expense
Balance Sheet
Current Assets
Debtors 47,000 prov for bad debts
less provision for bad debts (3,692) reduces debtors