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 $120,000 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 $97,700, aged as follows: (1) 1–30 days old, $82,000; (2) 31–90 days old, $11,000; and (3) more than 90 days old, $4,700. 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 $1,950 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

Solution 1:

Journal Entries - Innovative Tech
Date	Particulars	Debit	Credit
30-Nov	Bad debts expense Dr ($120,000*1%*1/4)	$300.00
	To Accounts receivables		$300.00
	(To record bad debts expense)

Solution 2:

Computation of Allowance for Uncollectible Accounts
Ageing	Accounts Receivables	% of uncollectible	Expected bad debt expense
1-30 days	$82,000.00	11.00%	$9,020.00
31-90 days	$11,000.00	22.00%	$2,420.00
More than 90 days	$4,700.00	44.00%	$2,068.00
Total	$97,700.00		$13,508.00

Journal Entries - Innovative Tech
Date	Particulars	Debit	Credit
31-Dec	Bad debts expense Dr ($13,508 - $1,950)	$11,558.00
	To Accounts receivables		$11,558.00
	(To record bad debts expense)

Innovative tech Inc.
Balance sheet (Partial)
Particulars		Amount
Accounts receivables, Gross	$97,700.00
Less: Allowance for doubtful accounts	$13,508.00
Accounts receivables, net		$84,192.00