.A and B are partners in a firm sharing profits and losses in the ratio 3 : 1. Their Balance Sheet as at 31st March, 2020 was:ASSETS- Cash Rs. 6,100; Sundry Debtors Rs.50,000 less Provisions for doubtful debts Rs.2,000; Stock Rs.15,000; Investment Rs.7,000; Goodwill Rs.40,000.LIABILITIES- Employees Provident Fund Rs.17,000; Workmen Compensation Reserve Rs.6,000; Investment Fluctuation Reserve Rs.2,100; A’s Capital Rs.56,000; B’s Capital Rs.35,000. On 1st April 2020, they admit C for 1/4th share on the following terms:(a)C brings in Rs.16,000 as goodwill and Rs.30,000 as his capital.(b)Bad debts amounted to Rs.3,000. (c)Market value of investment is Rs.4,500.(d)Liability on account of Workmen Compensation Reserve amounted to Rs.2,000.
Answers
Answer:
Provision for doubtful debts is created as a reserve for any bad debt that occurs. According to company's credit policies and other information, some percentage is fixed over sundry debtors as provision.
In the question sundry debtors balance is 76,000 and provision for doubtful debt is 8,000. We need to pass journal entries for the bad debt that occurred and 5% provision that needs to be maintained.
Bad Debt A/c Dr 6,000
To provision for doubtful debts A/c 6,000
(Transfer of bad debts to provision for doubtful debt A/c)
P&L A/c Dr 1,800
To Provision for doubtful debts A/c 1,800
Notes:- New provision to be created = 5%* 76,000 = 3,800
Add:- Bad debts = 6,000
Less:- Old provision =( 8,000)
Balance provision to be created from P&L = 1,800