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 Jan 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 Sep 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)The bad debts account and the provision for bad debts account
b)The relevant extracts from the income statement and balance sheet
To calculate the bad debts account and the provision for bad debts account for the year ended 31 December 2006, and the relevant extracts from the income statement and balance sheet, follow these steps:
a) Bad Debts Account:
1. Start with the provision brought forward from 1 Jan 2006, which is €520.
2. Add the bad debts written off during the year, which is €620.
3. Subtract the bad debt recovered (written off in 2003 and recovered on 30 Sep 2006), which is €300.
This will give you the total bad debts for the year.
b) Provision for Bad Debts Account:
1. Start with the provision brought forward from 1 Jan 2006, which is €520.
2. Calculate the provision for doubtful debts based on 10% of the year-end trade receivables.
- The remaining trade receivables on 31 Dec 2006 is €7,400.
- Multiply €7,400 by 10% (0.1) to get €740.
3. Subtract the provision for doubtful debts from the provision brought forward.
This will give you the new provision for bad debts.
c) Extracts from the Income Statement:
Include the bad debts written off (€620) as an expense item under "Bad Debts Expense" or "Provision for Bad Debts Expense" in the income statement.
d) Extracts from the Balance Sheet:
Include the provision for bad debts as a liability item, usually named "Provision for Bad Debts" or "Allowance for Doubtful Debts" under current liabilities on the balance sheet.
Here's an example of how the accounts would look:
Bad Debts Account:
€
Provision brought forward (1 Jan 2006) 520
Bad debts written off 620
Bad debt recovered -300
_______
Total bad debts €840
Provision for Bad Debts Account:
€
Provision brought forward (1 Jan 2006) 520
Provision for doubtful debts 740
_______
New provision for bad debts €1,260
Income Statement:
Bad Debts Expense €620
Balance Sheet:
Current Liabilities
Provision for Bad Debts €1,260
Please note that this is an example calculation based on the provided information. Adjustments may be needed based on the specific accounting policies and rules in place for the firm.