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Irrecoverable debts and provision for doubtful debts

 Understand the meaning of irrecoverable debts and recovery of debts written off
 Prepare ledger accounts and journal entries to record irrecoverable debts
 Prepare ledger accounts and journal entries to record recovery of debts written off
 Explain the reasons for maintaining a provision for doubtful debts
 Prepare ledger accounts and journal entries to record the creation of, and
adjustments to, a provision for doubtful debts.

Definition:

Provision for debts that are deemed uncollectible based on reasonable estimation
Contra-asset
Credit account

Calculating Provision for doubtful debts:

Trade receivables at end of accounting period × Rate of provision for doubtful debts (%)

Double-entry:

 Creating Provision for doubtful debts:

 Debit Income statement Expense
 Credit Provision for doubtful debts

 Adjusting an Increase in Provision for doubtful debts

 Debit Income statement Expense

 Credit Provision for doubtful debts

 Adjusting a Decrease in Provision for doubtful debts

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 Debit Provision for doubtful debts Income

 Credit Income statement

Presentation in Income Statement:

Income Statement (extract)

$
Other Income:
Decrease in provision for doubtful debts

Expenses:

Increase in provision for doubtful debt

Presentation in Statement of Financial Position:

Statement of Financial Position (extract)

$
Current assets:
Trade receivables
Less Provision for doubtful debt

Past Papers
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QUESTION 1 NOVEMBER 2011 P22 Q2 (c to f)

On 30 September 2011, after preparing the sales ledger control account Andrea was
advised that Keira is unable to pay the whole of her debt, $2 500.

Andrea accepted $500 in full settlement and the balance of the debt was written off.

REQUIRED

(c) Prepare the journal entry to record the transactions on 30 September 2011.
A narrative is not required. *3+

Andrea carried out a review of her remaining trade receivables before preparing her
financial statements. The following information relating to her trade receivables was
available:

Analysis of balances

$ Age of debt
George 11 500 One month
Ranjula 9 500 Two months
Harry 5 000 Four months
Trupti 1 500 Eight months
27 500

Andrea has the following policy for calculating the provision for doubtful debts:

Age of debts %
Up to 3 months 2
3-6 months 10
Over 6 months 20

REQUIRED

(c) Calculate the value of the provision for doubtful debts at 30 September 2011.
*4+
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(d) On 1 October 2010 the balance of the provision for doubtful debts account was
$1 500.

(e) Prepare the provision for doubtful debts account for the year ended 30
September 2011. Bring down the balance on 1 October 2011.
*3+
Name two accounting principles which Andrea is applying by maintaining a
provision for doubtful debts. *2+

QUESTION 2 NOVEMBER 2013 P21 Q2 ( a to c)

Raja supplied the following information relating to her trade receivables before the
preparation of the income statement for the year ended 31 May 2013.

1. 31 May 2012 31 May 2013

$ $
Trade receivables 18 800 19 200
Provision for doubtful debts 940 ?

2. The following accounts are to be written off as bad debts.

$
R B Brown 502
L Wong 90
P Singh 288

The provision for doubtful debts is maintained at 5% of trade receivables.

REQUIRED

(a) Prepare the provision for doubtful debts account for the year ended 31 May 2013.
Balance the account and bring the balance down on 1 June 2013. *6+

(b) Indicate with a tick (✓) the effect a reduction in the provision for doubtful debts
would have on the following:
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Increase Decrease No effect

Gross profit
Profit for the
year
Trade
receivables *3+

Raja is concerned that her profits have been falling and wishes to stop charging the
provision for doubtful debts in her income statement.

REQUIRED

(a) Advise Raja on whether she should continue to maintain a provision for doubtful
debts. Give reasons for your answer. *9+
QUESTION 3 NOVEMBER 2013 P22 Q2 (d & e)

Ann was informed that John Lee was unable to pay his outstanding balance of $2 300. It
was agreed that he would pay 40 cents for each dollar owed and he sent a cheque on 26
June 2013 in settlement. The balance was written off as a bad debt.

REQUIRED

(a) Prepare the general journal entry to write off the bad debt. A narrative is
required.

(b) Advise Ann why she should create a provision for doubtful debts. [6]

QUESTION 4 MAY 2016 P21 & 22 Q2 (e to h)

Sofea provided the following information about her trade receivables.

1. On 28 February 2016 Wade Designs, which owed Sofea $5 100, was declared
bankrupt. A cheque for $1 800 was received. The balance of the debt was
irrecoverable.

2. On 29 February 2016 the remaining trade receivables were:

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Age of debt Amount Provision for doubtful debts

(Months) ($) percentage (%)
Up to 1 month 18 000 2
1 to 3 months 12 200 5
3 to 6 months 3 300 10
Over 6 months 2 200 20
35 700

On 1 March 2015 the provision for doubtful debts account was $2 050.

REQUIRED

(e) Prepare the general journal to record the entries for Wade Designs on 28
February 2016.
A narrative is not required. *3+
(f) Calculate the provision for doubtful debts on 29 February 2016. *1+
(g) Prepare the provision for doubtful debts account for the year ended 29 February
2016. *3+
(h) Name one accounting concept applied by Sofea in providing for doubtful debts.
*1+