I understand the following facts from this question.
A. Bank has given a loan of Rs.200,000 to a customer on which Rs.10,000 has become due as interest.
B. On realising that they will not be able to recover full amount of Principal and Interest, they make a provision for Bad Debts of Rs.40,000 and Rs.2,000 against the Principal amount and the interest respectively.
C The loanee becomes insolvent and only 1/4 of the amount due is received from him.
So, the actual bad debts are:
Principal = (Rs.200,000 X 75/100) = Rs.150,000. Amount received on account of Principal is Rs.50,000.
Interest = (Rs.10,000 X 75/100) = Rs.7,500. Amount received on account of Interest will be Rs.2,500.
On receipt of these amounts the journal entry will be:
Bank A/c Dr. 52,500
Provision for Doubtful Debts Dr. 42,000
Bad Debts A/c Dr. 115,500
To Loan A/c 200,000
To Interest A/c 10,000
Note: Total bad debts are Rs.157,500 against which the provision is for Rs.42,000. The bad debts over and above the provision amount will be debited to Bad Debts A/c.