Question 35 of 35intermediate🔧 ApplyNumerical5 marks

Prepare the bad debts account, provision for account, profit and loss account and balance sheet from the following information as on March 31, 2017 Debtors: 80,000; Bad debts: 2,000; Provision for doubtful debts: 5,000. Adjustments: Bad debts 500. Provision on debtors @ 3%.

Correct Answer

Bad Debts Account Dr. side: To Balance b/d (2,000), To Sundry Debtors (500) = 2,500. Cr. side: By Provision for Doubtful Debts A/c = 2,500.

Provision for Doubtful Debts Account Dr. side: To Bad Debts A/c (2,500), To Balance c/d (2,385). Total = 4,885. Cr. side: By Balance b/d (Old Prov. 5,000), By Profit & Loss A/c (balancing figure 115). Total = 5,115.

Profit and Loss Account (Excerpt) Expenditure: Bad Debts (2,000 + 500) + New Provision (2,385) = 4,885. Less: Old Provision (5,000). Net Effect: Credit to P&L: ₹115.

Balance Sheet (Excerpt) Current Assets: Sundry Debtors (80,000 - 500) = 79,500. Less: Provision for Doubtful Debts (2,385). Debtors Balance = ₹77,115.

Exercise: Numerical Questions | Q: 15 | (Page 65)
For More Understanding

Explanation

To solve this, first calculate the total bad debts by adding the further bad debts (₹500) to the existing bad debts (₹2,000), totaling ₹2,500. Next, calculate the new provision for doubtful debts. The provision is 3% on debtors AFTER writing off the further bad debts (80,000 - 500 = 79,500). Thus, 3% of 79,500 is ₹2,385. In the Profit and Loss account, the new charges (Total Bad Debts 2,500 + New Provision 2,385 = 4,885) are compared against the old provision (5,000). Since the old provision is higher than the required new amount, there is a surplus, resulting in a credit to the Profit and Loss Account of ₹115 (5,000 - 4,885). Finally, the Balance Sheet shows the net debtors (79,500 - 2,385 = 77,115).

Solution Steps

  1. Step 1: Calculate Total Bad Debts. Existing (2,000) + Further (500) = ₹2,500.

  2. Step 2: Calculate New Provision on Debtors. (Debtors 80,000 - Further Bad Debts 500) * 3% = 79,500 * 3% = ₹2,385.

  3. Step 3: Prepare Bad Debts Account. Debit side shows opening balance and further bad debts; Credit side transfers total to Provision Account.

  4. Step 4: Prepare Provision for Doubtful Debts Account. Credit side has Old Provision (5,000). Debit side has Total Bad Debts (2,500) and New Provision Balance c/d (2,385). The balancing figure is ₹115 (Credit to P&L).

  5. Step 5: Show Impact on Profit and Loss. Charges (2,500 + 2,385 = 4,885) are less than Old Provision (5,000), so credit difference is ₹115.

  6. Step 6: Show Impact on Balance Sheet. Debtors (79,500) less New Provision (2,385) equals ₹77,115.

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