Kakaku limited with three departments has a total of N7,200,000 as net debtors for the year ended 31/12/2106. The company’s policy, provides for 15%bad debt annually. Which of the following represents the total balance of debtors before adjustment?
A. N6,120,000
A. N8,280,000
B. N6,120,300
D. N8,820,000
Correct Answer: Option A
Explanation
What is ‘Net Debt’?. Net debt shows a business’s overall financial situation by subtracting the total value of its cash, cash equivalents, and other liquid assets, a process called netting. All the information necessary to determine a company’s net debt can be found on its balance sheet.
A bad debt is a monetary amount owed to a creditor that is unlikely to be paid and, or which the creditor is not willing to take action to collect for various reasons, often due to the debtor not having the money to pay, for example, due to a company going into liquidation or insolvency.
net debtors = 7,200,000 (after all necessary deductions have been made)
bad debts = 15% ( an amount to be deducted from the total of all the debts owed to the company)
The question says, ”the total balance of debtors before adjustment” Remember net debtors is gotten after necessary deductions are made. This means that, the 15% provided as bad debts to be written off by the company, had already been deducted as well. to get the initial balance before the deductions, we simply get 15% of 7,200,000 and add it to the net debtors. Hence we have;
15/100 * 7,200,000 = N1,080,000
7,200,000 + 1,080,000 = N8,280,000
