A firm has in the past provided for bad debts on the basis of 10% of yr end trade receivables.
The provision brought forward (brought down) on 1 January 2006 was €520
During the yr ended 31 December 2006 the bad debts written off amounted to €620 and the remaining trade receivables totalled €7,400. On 30 September a bad debt of €300 written off in 2003 was recovered.
The usual provision for doubtful debts is to be made.
Required for year ended 31 December 2006;-
a)
To calculate the required provision for doubtful debts for the year ended 31 December 2006, you would need to follow the given information and steps below:
Step 1: Calculate the Bad Debts Written Off during the year:
The bad debts written off during the year amounted to €620.
Step 2: Calculate the Recovered Bad Debt:
A bad debt of €300 written off in 2003 was recovered on 30 September. Since this amount was previously written off, it should be deducted from the bad debts written off during the year.
So the net bad debts written off during the year would be €620 - €300 = €320.
Step 3: Calculate the Ending Trade Receivables:
The remaining trade receivables at the end of the year were €7,400.
Step 4: Calculate the Provision Brought Forward:
The provision brought forward (brought down) on 1 January 2006 was €520.
Step 5: Determine the Provision Rate:
The firm has historically provided for bad debts on the basis of 10% of year-end trade receivables.
Step 6: Calculate the New Provision:
To calculate the new provision, we need to consider the provision brought forward, the bad debts written off during the year (after deducting the recovered bad debt), and the ending trade receivables.
New Provision = Provision Brought Forward + Net Bad Debts Written Off + (Provision Rate × Ending Trade Receivables)
= €520 + €320 + (10% × €7,400)
Thus, the required provision for doubtful debts for the year ended 31 December 2006 (a) would be the calculated value from the above equation.