Question

E8-8 Recording and Reporting Allowance for Doubtful Accounts Using the Percentage of Credit Sales and Aging of Accounts Receivable Methods [LO 8-2) Innovative Tech Inc. (TI) has been using the percentage of credit sales method to estimate bad debts. During November, ITI sold services on account for $100,000 and estimated that 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 $89,000, aged as follows: (1) 1-30 days old, $75,000; (2) 31-90 days old, $10,000; and (3) more than 90 days old, $4,000. The average rate of uncollectibility for each age group is estimated to be (1) 10 percent. (2) 20 percent, and (3) 40 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 $1,600 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

Innovative tech Inc. ( ITI )
	Nov. 30 - Journal entry
Nov. 30	Bad debts exp.( 100000 *0.5% )	500
	Allowance for doubtful debts		500
Aging schedule
	Totals	Allowance %	Allowance needed
1 to 30	75000	10.00%	7500
31- 90	10000	20%	2000
more than 90	4000	40%	1600
	89000		11100
	2. Journal entry
Dec. 31	Bad debts exp.( 11100 - 1600 )	9500
	Allowance for doubtful debts		9500
Part 3- BS presentation
Gross amount of A/R		89000
Less;- Allowance for doubtful debts		11100
NRV		77900