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Bad Debt Exec

The document outlines the provision for doubtful debts for multiple companies, including XYZ Limited, Amazon, Zomato, Reliance Industries, and Vodafone. It provides calculations for accounts receivable, bad debt expenses, and provisions for doubtful debts based on specific percentages and historical data. Each section concludes with net accounts receivable figures for the respective companies' balance sheets.

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14 views5 pages

Bad Debt Exec

The document outlines the provision for doubtful debts for multiple companies, including XYZ Limited, Amazon, Zomato, Reliance Industries, and Vodafone. It provides calculations for accounts receivable, bad debt expenses, and provisions for doubtful debts based on specific percentages and historical data. Each section concludes with net accounts receivable figures for the respective companies' balance sheets.

Uploaded by

p24saswat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Provision for Doubtful Debts: XYZ Limited

Step 1: Key Information and Interpretation

 Opening balance of Accounts Receivable (31 March 2011): ₹500,000


 Provision for Doubtful Debts (PDD) as of 31 March 2011: ₹10,000 (2% of ₹500,000)
 Actual Bad Debts for the year 2011–12: ₹15,000
 Accounts Receivable at the end of the year (31 March 2012): ₹665,000
 Recovery of bad debts (Mr. Badman): ₹3,000
 Provision for Doubtful Debts (PDD) policy: 2% of the closing balance of Accounts Receivable (i.e.,
2% of ₹665,000)

Step 2: Calculating Provision for Doubtful Debts as of 31 March 2012

 Closing Accounts Receivable as on 31 March 2012: ₹665,000


 New Provision for Doubtful Debts (PDD) = 2% of ₹665,000 = ₹13,300

Step 3: Bad Debt Expense for 2011-12

 Bad Debt Expense for 2011-12:


o Actual bad debts written off during the year: ₹15,000
o Recovery from Mr. Badman: ₹3,000

So, Net Bad Debt Expense = ₹15,000 (written off) - ₹3,000 (recovery) = ₹12,000

Step 4: Income Statement Entries

1. Bad Debt Expense: ₹12,000 (includes net write-offs and recovery).


2. Provision for Doubtful Debts Adjustment:
o Opening PDD (as of 31 March 2011): ₹10,000
o New required PDD (as of 31 March 2012): ₹13,300
o Increase in PDD = ₹13,300 - ₹10,000 = ₹3,300 (this will be recognized as an additional
expense in the income statement).

Thus, the total Provision Expense in the income statement is ₹3,300.

Step 5: Balance Sheet as of 31 March 2012

1. Accounts Receivable:
o Closing balance: ₹665,000
2. Provision for Doubtful Debts:
o As of 31 March 2012: ₹13,300 (calculated as 2% of ₹665,000)
3. Net Accounts Receivable (to be shown on the balance sheet):

₹665,000−₹13,300=₹651,700

Step 6: Summary of Entries

Income Statement for the year ending 31 March 2012:


1. Bad Debt Expense (net): ₹12,000
2. Provision for Doubtful Debts Adjustment: ₹3,300
Balance Sheet as of 31 March 2012:
1. Accounts Receivable (Gross): ₹665,000
2. Less: Provision for Doubtful Debts: ₹13,300
3. Net Accounts Receivable: ₹651,700
Class Exercise
Amazon provides services to many sellers, and as part of its credit policy, it offers credit to
some of its smaller vendors. At the end of 2022, Amazon has accounts receivable of $200
million. Historically, 1.5% of its accounts receivable become uncollectible. During the year,
Amazon wrote off $2 million as bad debts and recovered $0.5 million from accounts
previously written off.

Question:

1. Calculate the provision for doubtful debts Amazon should record at the end of 2022.
2. Calculate the amount of net bad debt write-off in the Income statement also what will
be the effect of 1 above in Income statement /SOPL.
3. What will be the net accounts receivable on Amazon's balance sheet at the end of
2022?

Solution

1. Provision for Doubtful Debts:

Provision=1.5%×200,000,000=3,000,000

Amazon should record a provision for doubtful debts of $3 million.

2. Journal Entries:
For bad debts write-off:
Debit: Provision for Doubtful Debts (Bad Debt Expense) =2,000,000
Credit: Accounts Receivable=2,000,000
For recovery of bad debts:
Debit: Accounts Receivable=500,000
Credit: Provision for Doubtful Debts=500,000

3. Net Accounts Receivable:

Net Accounts Receivable


=Gross Receivable−Provision for Doubtful Debts=200,000,000−3,000,000=197,000,000 =

The net accounts receivable will be $197 million.


Zomato’s Bad Debt Write-off and Provision Adjustment

Zomato provides credit to its restaurant partners. At the end of 2021, the company's accounts
receivable was ₹80 million. During 2022, the company realized ₹3 million in bad debts and
recovered ₹1 million from previously written-off accounts. At the end of 2022, the balance in
the accounts receivable account is ₹95 million. Zomato’s policy is to maintain a provision for
doubtful debts at 3% of the closing balance of accounts receivable.

Question:

1. Calculate the provision for doubtful debts at the end of 2022.


2. What will be the bad debt expense for 2022?
3. Provide the net accounts receivable figure for the balance sheet at the end of 2022.

Provision for Doubtful Debts:

Provision = 3 % × 95,000,000 =2,850,000

The provision for doubtful debts at the end of 2022 will be ₹2.85 million.

Bad Debt Expense for 2022: Bad debt expense = Bad debts written off - Recovery of bad
debts:
Bad Debt Expense =3,000,000−1,000,000 =2,000,000

Net Accounts Receivable:

Net Accounts Receivable=Closing Accounts Receivable−Provision for Doubtful Debts==


95,000,000 - 2,850,000 = 92,150,000

Net accounts receivable at the end of 2022 will be ₹92.15 million.


Exercise 3: Reliance Industries’ Bad Debt Management

Reliance Industries has a diverse portfolio of businesses, some of which extend credit to
clients. As of March 2022, Reliance has accounts receivable worth ₹500 million. Historically,
1% of their accounts receivable turns into bad debts. During the year, Reliance wrote off ₹10
million as bad debts and recovered ₹2 million. At the end of March 2023, Reliance's accounts
receivable stands at ₹530 million.

Question:

1. Calculate the provision for doubtful debts Reliance should record at the end of March
2023.
2. What is the total bad debt expense for the year?
3. Calculate the net accounts receivable to be shown on the balance sheet as of March 2023.

Solution:

 Provision for Doubtful Debts: Provision=1%×530,000,000 =5,300,000


 Provision=1%×530,000,000=5,300,000
 Reliance should record a provision of ₹5.3 million.

Total Bad Debt Expense:

Bad Debt Expense=10,000,000−2,000,000=8,000,000

The total bad debt expense for the year is ₹8 million.

3. Net Accounts Receivable=Accounts Receivable−Provision for Bad Debts

Net Accounts Receivable=₹530million−₹5.3million=₹524.7million


Vodafone’s Bad Debts and Provisions

Vodafone, a telecom giant, has extended credit to many of its corporate clients. At the end of
2022, Vodafone’s accounts receivable was €350 million. During the year, Vodafone wrote
off €20 million in bad debts and recovered €5 million from previously written-off accounts.
At the end of 2023, the company’s accounts receivable balance is €400 million, and they
maintain a provision for doubtful debts at 2.5% of the closing accounts receivable balance.

Question:

1. Calculate Vodafone’s provision for doubtful debts at the end of 2023.


2. Prepare the journal entries for bad debt write-off and recovery.
3. What will be the net accounts receivable for the balance sheet at the end of 2023?

Provision for Doubtful Debts:

Provision =2.5%×400,000,000=10,000,000

Vodafone should record a provision for doubtful debts of €10 million.

Journal Entries:

For bad debts written off:

Debit: Provision for Doubtful Debts =20,000,000

Credit: Accounts Receivable = 20,000,000

For recovery of bad debts:

Debit: Accounts Receivable=5,000,000

Credit: Provision for Doubtful Debts =5,000,000

Net Accounts Receivable: Net Accounts Receivable = Closing Accounts Receivable −

Provision for Doubtful Debts =400,000,000−10,000,000 =390,000,000

Net Accounts Receivable=Closing Accounts Receivable−Provision for Doubtful Debts=400,


000,000−10,000,000=390,000,000

The net accounts receivable at the end of 2023 will be €390 million.

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