(A) Explain why a provision may be made for doubtful debts. (B) Explain the procedure to be...
Question:
(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 2010 D. Watson had debtors of £25,000 on which he had made an allowance for doubtful debts of 3%. During 2010,
(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 2010 total accounts receivable 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 allowance for doubtful debts at 3% of accounts receivable. Required: (1) For the financial year ended 31 December 2010, show the entries in the following accounts: (i) Allowance for doubtful debts (ii) Bad debts (2) What is the effect on net profit of the change in the allowance for doubtful debts? (Scottish Qualifications Authority)
Step by Step Answer:
Frank Woods Business Accounting
ISBN: 9780273759287
12th Edition
Authors: Frank Wood. Sangster, Alan