Exercise number 1
The following balances appeared in the trial balance on 31/12/2015:
The following balances appeared in the trial balance on 31/12/2015:
Required :
Recording settlement entries and indicating their impact on the statement of financial position, according to the following cases:
The first case: If the company decides to form an allowance for doubtful debts at a rate of 6% of the debtors’ balance.
The second case: If the company decided to write off a debt of $200, and set up a provision for doubtful debts at 3% of the debtors' balance.
Solution method:
The first case:
1 The balance of bad debts shown in the trial balance is closed in the allowance account for doubtful debts as follows:
2 When creating a new allowance at 6% of the balance of debtors, the balance of the new allowance becomes equal to 100000 * 6% = 6000$, and then the balance of the old provision is compared (4600)
With the balance of the new allowance (6000) and recording the difference, which will equal 6000-4600 = $1400 (increase): the default is to close bad debts in the profit and loss account
(Income summary), but because there is a balance for the allowance, it is therefore closed in the allowance account, and after recording this entry, the balance of the old allowance becomes equal to (5000-400=4600$)
3 When preparing the statement of financial position, the net debtors balance will appear as follows:
List of financial position for the year 2015
The second case :
1 The bad debt is recorded and proven as follows: The second case:
2 The bad debts account is closed in the allowance account for doubtful debts as follows: after registration and verification
Bad debts, the balance of debtors will be equal to (100,000-200 = $99,800)
3 When a new provision is formed at the rate of 3% of the balance of debtors, the balance of the new provision becomes equal to 99800 * 3% = $2994, and then the balance of the old provision is compared (4400) with the balance of the new provision after closing the bad debts account in the allowance account for doubtful debts, it will become The balance of the old provision is equal to (5000-600=4400$)
(2994) and registering the difference, which will equal 4400-2994=1406$ (decrease):
List of financial position for the year 2015
4 When preparing the statement of financial position, the net debtors balance will appear as follows:
The amount of assets, the amount of liabilities, and equity
Assets
99,800 debtors
(2994) provision for doubtful debts
96,806 debtors, net
xxx total assets xxx total liabilities and equity
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