(A) Explain why a provision may be made for doubtful debts.

(B) Explain the procedure to be followed when a customer whose debt has been written off as bad subsequently pays the amount originally owing.

(C) On 1 January 20X7 D Watson had debtors of £25,000 on which he had made a provision for doubtful debts of 3%.

During 20X7,

(i) A Stewart who owed D Watson £1,200 was declared bankrupt and a settlement of 25p in the £ was made, the balance being treated as a bad debt.

(ii) Other bad debts written off during the year amounted to £2,300.

On 31 December 20X7 total debtors amounted to £24,300 but this requires to be adjusted as follows:

(a) J Smith, a debtor owing £600, was known to be unable to pay and this amount was to be written off.

(b) A cheque for £200 from S McIntosh was returned from the bank unpaid. D Watson maintained his provision for doubtful debts at 3% debtors.

Required:

(1) For the financial year ended 31 December 20X7, show the entries in the following accounts:

(i) Provision for doubtful debts

(ii) Bad debts

(2) What is the effect on net profit of the change in the provision for doubtful debts?