Adjusting Provision for Doubtful Debts

Steps:

• Write off $500 irrecoverable debt: receivables reduce to$4,250; opening provision reduces to $1,080.
• Calculate required closing provision: 5% × $4,250 =$212.50.
• Determine adjustment: $1,080 -$212.50 = $867.50 excess provision to release.
• Income statement entry: credit doubtful debts expense by $867.50 (net income effect).

Why A is correct:

• A reflects the net release of $867.50, matching the formula for provision adjustment: (opening provision - bad debts written off) - (required % × adjusted receivables).

Why the others are wrong:

• B ignores write-off, overstates required provision on gross receivables.
• C treats full $500 as new expense without using existing provision.
• D misapplies 5% to unadjusted $4,750, inflating the figure.

Final answer: A