Question 4

Kamaraj commenced business on 1 January 2016 and prepares her financial statements to 31 December every year. For the year ended 31 December 2016, bad debts written off amounted to $1,800. It was also found necessary to create an allowance for doubtful debts of $3,000. In 2017, debts amounting to $2,500 proved bad and were written-off. Selvi, whose debt of $300 was written-off as bad in 2016, settled her account in full on 30 November 2017. As at 31 December 2017 total debts outstanding were $100,000. It was decided to bring the provision up to 5% of this figure on that date. In 2018, $5,000 of debts were written-off during the year and another recovery of $400 was made in respect of debts written-off in 2016. As at 31 December 2018, total debts outstanding were $80,000. The allowance for doubtful debts is to be changed to 6% of this figure.

You are required to prepare for the years 2016, 2017 and 2018, the:

i. Bad Debts Account (6 marks)

ii. Bad Debts Recovered Account (4 marks)

iii. Allowance for Doubtful Debts Account (6 marks)

iv. An Extract of the Statement of Profit or Loss (4 marks)