Question

Bonus question (3 pts); due 11/4 at the start of class NAME RECORDING AND REPORTING ALLOWANCE FOR DOURTFUL ACCOUNTS USING THE PERCENTAGE OF CREDIT SALES AND AGING OF ACCOUNTS RECEIVABLE METHODS Innovative Tech Inc. (MTI) has been using the percentage of credit sales method to estimate had debts. During November, ITI sold services on account for $100,000 and estimated that of 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, 54,000. 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

	ANSWER = 1
		CALCULATION OF PROVISION OF BAD DEBTS ON THE BASIS OF ACCOUNT RECEIVABLE
		Services of the year	$               1,00,000
		Allowance for doubtful accounts is 1/2 of 1% of 100,000 =	$                        500
	Journal Entries
	Date	Account Title and explanation	Debit	Credit
	Dec-31	Bad Debt Expenses	$                        500
		To Allowance for Doubtful Debts		$                                  500
		(To Record the Bad Debt expenses of the year)
	ANSWER = 2
		SCHEDULE TO ESTIMATE AN APPROPRIATE YEAR END BALANCE
			AR Balance	% of uncollectable	Allowance for Doubtfull debt
		Aged period 1-30 Days	$                  75,000	10%	$                        7,500
		Aged period 31-90 Days	$                  10,000	20%	$                        2,000
		More than 90 Days	$                     4,000	40%	$                        1,600
		Total			$                     11,100
		Answer = Year End balance of allowance for doubtfull debt = $ 11,100
	ANSWER = 3
		Alloawance for doubtfull accounts =	$                  11,100
		Less: Opening credit Balance	$                     1,600
		Bad Debt Expenses of the year	$                     9,500
	Journal Entries
	Date	Account Title and explanation	Debit	Credit
	Dec-31	Bad Debt Expenses	$                     9,500
		To Allowance for Doubtful Debts		$                               9,500
		(To Record the Bad Debt expenses of the year)
	ANSWER = 4
		Bad Debts expenses is recoded in income statement for $ 9,500
		Allowance for doubtfull account will be shown as contra assets for Account Receivable for $ 11,100