ICANFinancial AccountingSole Trader Final Accounts2023

Mr Emeka Obi, a sole trader, extracted the following balances at 31 March 2024: Trade receivables ₦620,000; Allowance for doubtful debts (opening) ₦40,000; Bad debts written off during the year ₦25,000; It is the business policy to maintain an allowance for doubtful debts at 5% of closing trade receivables after writing off bad debts. What amount should be charged to the statement of profit or loss for bad and doubtful debts expense in total for the year ended 31 March 2024?

A₦27,250CORRECT
B₦55,750
C₦52,250
D₦14,750
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Why the answer is A, and why the others tempt you.
Closing trade receivables after write-off = ₦620,000 − ₦25,000 = ₦595,000. Required allowance = 5% × ₦595,000 = ₦29,750. Increase in allowance = ₦29,750 − ₦40,000 = −₦10,250 (i.e., a reduction/credit to P&L of ₦10,250). Total bad and doubtful debts charge = Bad debts written off ₦25,000 − Reduction in allowance ₦10,250 = ₦14,750. The correct answer is therefore D: ₦14,750.
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