1
(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 2007 D Watson had debtors of £25,000 on which he had made a provision for
doubtful debts of 3%.
During 2007,
(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 2007 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 2007, 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?
(Scottish Qualifications Authority)