Ch.7 Bad Debts and Provision for Bad Debts

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Ch.7  Bad Debts and Provision for Bad Debts Powered By Docstoc
					                         MARYKNOLL SECONDARY SCHOOL
                               Principles of Accounts


8    Bad Debts and Provision for Bad Debts
BAD DEBTS
If a firm finds that it is impossible to collect a debt then the debt should be written off as a
Bad Debts.
Double Entry for Bad Debts
          Dr. Bad Debts A/C
          Cr. Debtor A/C
          Dr . Profit & Loss A/C
          Cr. Bad Debts A/C
Example: 1999 Jan 1 Credit Sales to Mr. A $500.
             Apr 30 Mr A was declared bankrupt. We decided to write him off.
Ex. 8.1
On 1 January 1998, we sold goods go Mr Wong on credit for $1000. On 3 January, Mr
Wong returned goods to us for $100. On 20 November 1999, we received $600 from Mr.
Wong and the outstanding balance as irrecoverable and we wrote it off as bad debts.
Show how these matters would be dealt with in the company’s ledger.

Ex. 8.2
On 1 January 1999, the balances below appeared in the sales ledger of Peter Lee:-
James Chan $200, Johnson Lee $500
On 1 February, after negotiation Peter Lee agreed to accept $50 cash from James Chan and
the outstanding balance as irrecoverable and written off as bad debts.
On 10 August, Johnson Lee was declared bankrupt. His debts were to be written off as bad
debts.
Show how these matters would be dealt with in Peter Lee’s ledger.

Ex. 8.3
On 1 January 1999 the balances below appeared in the sales ledger of Simon Lee:-
D Fung $350, C Chang $200.
During the year the following events took place:
Feb 1 After negotiation Lee agreed to accept $150 cash from D Fung and regard the
        outstanding balance as irrecoverable.
Mar 10 C Chang was declared bankrupt. A payment of 30 cents in the $ was received in
        full settlement.
Show how these matters would be dealt with in Lee’s ledger assuming that the financial
year ends on 30 June.

                                                1
                        MARYKNOLL SECONDARY SCHOOL
                              Principles of Accounts
PROVISION FOR BAD DEBTS
The bad debts is a known cost to the business. But an adjustment should be made as a
provision on the closing value of debtors to anticipate possible losses. The provision
reduces the value of total debtors in an attempt to give their real worth to the business.
          Dr. Profit & Loss A/C
          Cr. Provision for Bad Debts A/C
Once the Provision A/C is created, it will therefore contain a credit balance.
Increase in Provision:-
          Dr. Profit & Loss A/C
          Cr. Provision for Bad Debts A/C
Decrease in Provision:-
          Dr. Provision for Bad Debts A/C
          Cr. Profit & Loss A/C
Example:
Year                Debtors                 Provision for Bad Debts
1997                $30,000                 5%
1998                $50,000                 5%
1999                $40,000                 5%
You are required to draw up the Provision for Bad Debts A/C, Profit & Loss A/C and
Balance Sheet for the year 1997,1998 and 1999.

Ex. 8.4
Year              Debtors           Bad Debts               Provision for Bad Debts
1995              $30,500           $500                    10%
1996              $70,800           $800                    10%
1997              $50,900           $900                    10%
You are required to draw up Bad Debts A/C, Provision for Bad Debts A/C, Profit & Loss
A/C and Balance Sheet for the year 1995, 1996 and 1997.

Ex. 8.5
During the year ended 31 December 1999 Thomas Church incurred the following Bad
Debts:- William Smith $50, John Chan $80 and David Wong $100.
At the close of business on 31 December 1998, Thomas Church’s Provision for Bad Debts
had a balance of $150. At the close of business on 31 December 1999, his net debtors
balance totalled $3800 and on this date he decided to provide a 5% Provision for Bad
Debts.
You are required to draw up the Bad Debts A/C, Provision for Bad Debts A/C and Profit &
Loss A/C for the year 1999.


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                         MARYKNOLL SECONDARY SCHOOL
                               Principles of Accounts
Ex. 8.6

On 30 September 2007 T. Young’s debtors totaled $12,000. He decided to write off the
following as bad debts:
                                                 $
               K. Kwong                          60
               H. Sing                           80

He further decided to make provision for bad debts of 10 per cent on the remaining debtors.

Debtors on 30 September 2008 totalled $10,000 when Young decided to maintain the
provision at 10 per cent.

Show the each of the years ended 30 September 2007 and 2008:
(i)   The provision for bad debts account
(ii)  The appropriate entries in the profit and loss accounts
(iii) The necessary balance sheet entries on each of the above dates.

Ex. 8.7
Albert Au ended his first year’s trading on 31 December 1997. On that date, Sales Ledger
balances totalled $2,800. He examined the balances in detail and decided to write off
balances totally $140, which he considered irrecoverable. He created a 5% provision for
doubtful debts on the remaining balance of the Sales Ledger.
Sales Ledger transactions for 1998 were:-
          Credit Sales                       $28,400
          Sales returns                         $580
          Bad Debts written off                 $730
          Cash received                      $24,370
At the end of 1998, he decided to maintain the provision for doubtful debts on 5%.
You are required to draw up the Sales Ledger A/C and Provision for Doubtful Debts for the
year 1998.


Ex. 8.8
Billy Tong owns a wholesaling business. He adjusts the Provision for Bad Debts at the end
of each financial year. Bad Debts are written off Debtors Accounts as they become known.
The following information is available:-
                                            31/12/1997      31/12/1998       31/12/1999
Bad Debts written off                       $1120           $2370            $1680
Net Total Debtors                           $19700          $26500           $24000
Provision for Bad Debts                     6%              5%               4%

The balance of the Provision for Bad Debts A/C was $800 on 1 January 1997.
You are required to draw up the Bad Debts A/C, Provision for Bad Debts A/C, Profit &
Loss A/C and Balance Sheet for the year 1997, 1998 and 1999
                                             3
                           MARYKNOLL SECONDARY SCHOOL
                                 Principles of Accounts

BAD DEBTS RECOVERED
When a debt previously written off as bad is subsequently paid, the debt may first be
reinstated in the personal account and then the receipt of cash is recorded through the
personal account. A bad debts recovered account should be opened as a revenue in the
period.
          Dr Debtors A/C
          Cr. Bad Debts Recovered A/C
          Dr. Bank A/C
          Cr. Debtor A/C
          Dr. Bad Debts Recovered A/C
          Cr. Profit & Loss A/C


Ex. 8.9

1995       Jan 1   Credit Sales to Mr. Chan $5000.
           Feb 1   Mr. Chan returned goods $200 to us.
           Mar 5   Mr. Chan paid us $1000.
1996       May 1   We wrote off Mr. Chan as Bad Debts.
1997       Oct 1   Mr. Chan paid us $3800.

You are required to draw up the appropriate accounts for the year 1995, 1996 and 1997.


Ex. 8.10

On 31 December 2000 Mr. White’s debtors totalled $58,000. He decided to write off the
following as bad debts:
                                          $
                         J. Law 100
                         W. Chan          230
                         D Liu            160

He further decided to make provision for bad debts of 5 per cent on the remaining debtors.

On 15 March 2001, a cheque of $230 from. W. Chan was received in full settlement of the
account previously written off as bad debts.

On 21 June 2001, D Liu paid us $160 to settle his account.

You are required to prepare:
(i)    Debtors A/C.
(ii)   Bad Debts A/C,
(iii) Provision for Bad Debts A/C
(iv)   Bad Debts Recovered A/C.


                                             4
                       MARYKNOLL SECONDARY SCHOOL
                             Principles of Accounts
Ex. 8.11
The following information as at 31 December 2001 is obtained from the books of Mr. Lam:
                                                          $
       Debtors                                            245,000
       Provision for Bad Debts (1.1.2001)                   10,000

On 31 December 200, he decided to write of the following as bad debts:
                                                          $
      Mr. Kwan                                            600
      Miss Hung                                           800

He decided to make provision for bad debts of 10% on remaining debtors.

On 20 April 2002, a cheque for $600 from Mr. Kwan was received in full settlement of the
account previously written off as a bad debts.

Debtors on 31 December 2002 totalled $175,000 and Mr. Lam decided to maintain the
provision at 10%.

Prepare the following for the year ended 2001 and 2002:
(i)    Bad Debts A/C (ii) Provision for Bad Debts A/C (iii) Bad Debts Recovered A/C

Ex. 8.12
Zolar Co. started its business trading in electronic products on 1 January 1989. During the
first two years, the following bad debts were written off:

1989                                 $            1990                                $
Mar 3    Wilson Co                    5,000       Feb 10   Sunny Electronics        110,000
Apr 7    A. Tang                      3,000       Mar 25   C. Leung                   4,000
Aug 15   E. Ng                          800       Jun 5    Novel Shop                32,000
Oct 11   Ramsan Co                   11,200       Jul 11   K. Wong                    1,200

The debtors account had the following year end balances:
       Year                                 $
       1989                                 250,000
       1990                                 670,000
       1991                                 432,000
Provision for bad debts was made as follow:
       Year                                 % on debtors
       1989                                     5%
       1990                                     8%
       1991                                     10%

On 20 February 1991, a cheque for $11,2000 from Ramsan Co. was received in full
settlement of the account previously written off as a bad debt.

Prepare the following for the year ended 31 December 1989, 1990 and 1991
(i)    the bad debts account,
(ii)   the provision for bad debts account
(iii) the bad debts recovered account, and
(iv)   the account of Ramsan Co.
                                              5
                        MARYKNOLL SECONDARY SCHOOL
                              Principles of Accounts

Ex. 8.13

The following trial balance was extracted from the books of Mr. Ng at the close of business
on 30 Setpember 1999

                                                                     Dr. ($)      Cr. ($)
Purchases and sales                                                      9,340      17,310
Bad Debts written off                                                      210
Wages and salaries                                                       2,570
Purchases returns                                                                        460
Discounts                                                                  530           330
Rent and rates                                                             620
Heating and lighting                                                       450
Carriage outwards                                                          620
Sales returns                                                              940
Debtors and creditors                                                    3,960           960
Stock 1 October 1998                                                     1,760
Office furniture                                                         1,950
Provision for depreciation – office furniture                                           1,050
Delivery van                                                               900
Provision for bad debts                                                                   200
Capital account 1 October 1998                                                          6,500
Drawings                                                                 1,970
Bank                                                                       860
Cash                                                                        40
Sundry expenses                                                             90
                                                                        26,810      26,810

Notes:
(1) Stock 30 September 1999 $2,170
(2) Rent prepaid 30 September 1999 $60
(3) Wages accrued 30 September 1999 $50
(4) Provision for depreciation:
    Office furniture           30% on reducing balance
    Delivery van               20% on cost
(5) Provision for bad debts to be increased by $60
(6) During the year ended 30 September 1999, Mr. Ng took goods costing $100 for his
    private use. This has not been recorded in the books.

Prepare the trading and profit and loss account for the year ended 30 September 1999,
together with a balance sheet at that date.




                                                6
                       MARYKNOLL SECONDARY SCHOOL
                             Principles of Accounts

Ex. 8.14
The following list of balances was extracted from the books of A. Ming, a wholesale
distributor, on 31 December 2001

                                                                         $
         Capital                                                       102 900
         Debtors                                                        47 000
         Creditors                                                      29 000
         Premises                                                       80 000
         Discount allowed                                                 4 100
         Purchases                                                     315 000
         Sales                                                         462 000
         Furniture at cost                                                8 000
         Advertising                                                      1 500
         Motor vans at cost                                             27 000
         Provision for depreciation of motor vans                         6 000
         Purchases returns                                                4 500
         Balance at Bank (Dr.)                                          20 200
         Sales returns                                                    7 400
         Discount received                                                2 700
         Bad debts written off                                            1 900
         Provision for doubtful debts                                     2 200
         Drawings                                                         6 000
         General expenses                                                 9 600
         Stock at 1 January 2001                                        28 000
         Provision for depreciation on furniture                          2 400
         Rates                                                            1 600
         Wages                                                          50 900
         Carriage inwards                                                 3 500

Notes:
(a) Stock at 31 December 2001 was valued at $22 000
(b) Rates prepaid amounted to $400
(c) The motor vans are to be depreciated at the rate of 20% on cost and furniture at 10% on
    cost
(d) The provision for bad debts is to be adjusted to 5% of debtors
(e) Wages accrued amounted to $800

Prepare for A. Ming, a trading and profit and loss account for the year ended 31 December
2001 and a balance sheet as at that date.




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