Question

Innovative Tech Inc. (ITI) has been using the percentage of credit sales method to estimate bad debts. During November, ITI sold services on account for $130,000 and estimated that 1/4 of 1 percent of those sales would be uncollectible.

Required:

1. Prepare the November adjusting entry for bad debts.

2. Starting in December, ITI switched to using the aging method. At its December 31 year-end, total Accounts Receivable is $99,000, aged as follows: (1) 1–30 days old, $84,000; (2) 31–90 days old, $10,000; and (3) more than 90 days old, $5,000. The average rate of uncollectibility for each age group is estimated to be (1) 11 percent, (2) 22 percent, and (3) 44 percent, respectively. Prepare a schedule to estimate an appropriate year-end balance for the Allowance for Doubtful Accounts.

3. Before the end-of-year adjusting entry is made, the Allowance for Doubtful Accounts has a $2,100 credit balance at December 31. Prepare the December 31 adjusting entry.

4. Show how the various accounts related to accounts receivable should be shown on the December 31 balance sheet.

Answer 1

a) Adjusting entry

Date	account and explanation	Debit	Credit
Dec 31	Bad debt expense (130000*1%*1/4)	325
	Allowance for doubtful accounts		325
	(To record adjusting entry)

b) Schedule

Days	Account receivable	% uncollectible	$ uncollectible
1-30	84000	11%	9240
31-60	10000	22%	2200
Over 90	5000	44%	2200
Total	99000		13640

c) Adjusting entry

Date	account and explanation	Debit	Credit
Dec 31	Bad debt expense (13640-2100)	11540
	Allowance for doubtful accounts		11540
	(To record adjusting entry)

d) Balance sheet

Current assets
Account receivable	99000
Less: Allowance for doubtful accounts	-13640	85360