Somtochukwu Enterprises has four credit customers, namely: Jude, Jideobi, Jidenwa, and Jideonu. The business prepares its accounts every 31 December. As at 31 December 2017, they owe the following amounts:
Jude ₦20,000
Jideobi ₦18,000
Jidenwa ₦29,000
Jideonu ₦21,000
Jude and Jideobi have owed Somtochukwu Enterprises since 31 April 2015. Jidenwa and Jideonu have owed since 1 July 2015 and 3 August 2015, respectively.
The policy of Somtochukwu Enterprises is to provide for doubtful debts as follows:
One to three months: 2 percent
Four to six months: 4 percent
Seven to nine months: 6 percent
Ten to twelve months: 10 percent
Over one year: 28 percent
The gross profit for the 31 December 2017 accounting year is ₦289,000.
Required: Based on Somtochukwu Enterprises' policy for provision for doubtful debts, estimate the monetary value of provision for doubtful debts that should be recognised in the statements of financial position and profit or loss, respectively, at the end of the 2017 accounting year.
Suggested answer to practice activity 6.18
Somtochukwu Enterprises
Calculation of provision for doubtful debt
The amount or estimate of trade receivables recognised in the statement of financial position is net of bad debts. The estimate or amount of bad debts is excluded from trade receivables.
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