UK Clarification on provision for ad debt and sale of fixed assets on a SOFP & IS

[Panthera]

Hey all,

I think I understand the basics but I'm not 100% sure where it all goes and what is debited/credited where and when. Hope one of you are kind enough to assist.

Key figures from Trial balance for 31/12/2022 reads

	DR $​	CR $​
Machine cost	1,000,000​
Accounts receivable	500,000​
Provision for bad debt 01/01/2022	10,000​

This makes my SOFP and IS look like this. Numbers in black. (I think, not sure if provision for bad debt goes on the IS if carried over from previous year?)

	SOFP​				IS​
Non-current assets				Provision for bad debt	10,000​	(10,000)​
Machine cost	1,000,000​	​		Loss on machine		(450,000)​
Sale of machine		(500,000)​
Current assets
Accounts receivable	500,000​	(10,000)​
Provision for bad debt	10,000​	(10,000)​
Bank balance		50,000​

My confusion really starts with these questions

In red
1. Machine purchased in Jan-2022 for $500,000 was sold in Nov-2022 for $50,000. Disposal of machine not recorded in the Trial Balance.

a. Due to the machine being purchased after year start and sold before year end, it's not affected by any deprecation applied at year end, correct?​

b. The machine was sold at loss, so we have to​

b1: deduct machine value from Machine cost (1,000,000 - 500,000)​

b2: Add sales amount to bank balance as it becomes current asset​

b3: record loss of sales as expense in IS (500,000 - 50,000 = 450,000)​

​

I feel I'm missing another step here but can't figure out what?

In blue
2. Bad debt of 10,000 is to be written off.

a. Debit the Provision for bad debt account for the bad debt (10,000 - 10,000)​

b. Credit the Accounts receivable account for the bad debt (500,000 - 10,000)​

c. Debit the Provision for bad debt expense account (IS, 10,000 - 10,000)​

​

Again, something doesn't feel right, am I missing an account for both above?

Thanks in advance for any assistance

​

​

 

[DrStrangeLove]

You aren't missing anything, really. But your steps are a bit jumbled. It's clearer if you write out the journal entries for each transaction.

1.) You bought a machine for $500,000 in January, and you sell it for $50,000 in November. No depreciation has been booked, so you just need to remove the cost of the machine, and then book the cash received and the loss on the sale:

Cash 50,000 DR
Loss on Sale 450,000 DR
Machine 500,000 CR

2.) You previously put up the provision by booking the provision against bad debt expense:

Bad Debt Expense 10,000 DR
Provision for Bad Debts 10,000 CR

So your initial balance sheet is showing the provision on the wrong side. And the provision account is a balance sheet account; you show it on the income statement, where it doesn't go.

When a receivable actually goes bad, you write off the receivable against the provision:

Provision for Bad Debts xxx DR
Accounts Receivable xxx CR

If you have any bad debt provision that you no longer need to hold (all the receivables were collected, for example), then you take down the remaining provision by reversing it out of bad debt expense:

Provision for Bad Debts xxx DR
Bad Debt Expense xxx CR

Writing out the journal entries usually helps keep things clear.