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 $110,000 and estimated that 1/4 of 1 percent of those sales would be uncollectible. Required: Prepare the November adjusting entry for bad debts. Starting in December, ITI switched to using the aging method. At its December 31 year-end, total Accounts Receivable is $94,400, aged as follows:

(1) 1–30 days old, $79,000;

(2) 31–90 days old, $11,000; and (3) more than 90 days old, $4,400.

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. Before the end-of-year adjusting entry is made, the Allowance for Doubtful Accounts has a $1,800 credit balance at December 31. Prepare the December 31 adjusting entry. Show how the various accounts related to accounts receivable should be shown on the December 31 balance sheet.

Answer 1

Solution:

Journal Entries - ITI
Date	Particulars	Debit	Credit
30-Nov	Bad debts expense Dr ($110,000*1%*1/4)	$275.00
	To Allowance for doubtful accounts		$275.00
	(To record bad debts expense for the month)

Computation of allowance for estimated uncollectibles - ITI
Customer	1-30 days	31-90 days	>90 days	Total
Total Receivables	$79,000.00	$11,000.00	$4,400.00	$94,400.00
Percentage uncollectibles	11%	22%	44%
Allowance for doubtful accounts	$8,690.00	$2,420.00	$1,936.00	$13,046.00

Adjusting Journal Entries - ITI
Date	Particulars	Debit	Credit
31-Dec	Bad debts expense Dr ($13,046 - $1,800)	$11,246.00
	To Allowance for doubtful accounts		$11,246.00
	(To record adjusting entry for bad debts expense)

Innovative Tech Inc. (ITI)
Balance Sheet (Partial)
Particulars	Amount
Accounts receivables - Gross	$94,400.00
Less: Allowance for doubtful accounts	$13,046.00
Accounts receivables - Net	$81,354.00