At the time of admission of new partner Vasu, old partners Paresh and Prabhat had debtors of Rs. 6,20,000 and a provision for doubtful debts of Rs. 20,000 in their books. As per terms of admission, provision for doubtful debts is to be maintained on Sundry Debtors at a provision of 5%. How it will be shown in the balance sheet?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Debtors Rs. 6,20,000 and Provision for doubtful debts Rs 31,000
A provision for doubtful debts is a percentage of the debtors. On admission the new rate (5%) is applied to the full debtors; the old provision of Rs. 20,000 is replaced, not added to. The debtors themselves are not changed.
New provision = 5% of Rs. 6,20,000 = Rs. 31,000
Old provision = Rs. 20,000
Increase in provision = Rs. 31,000 − Rs. 20,000 = Rs. 11,000, debited to Revaluation Account as a loss
The Balance Sheet shows debtors of Rs. 6,20,000 less a provision of Rs. 31,000. Rs. 11,000 is only the increase passed through the Revaluation Account, not the provision itself.