Question

Innovative Tech Inc. (ITI) uses the percentage of credit sales method to estimate bad debts each month and then uses the aging method at year-end. During November, ITI sold services on account for $120,000 and estimated that ¹/₄ of one percent of those sales would be uncollectible. 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. Experience has shown that for each age group, the average rate of uncollectibility is (1) 11 percent, (2) 22 percent, and (3) 44 percent, respectively. Before the end-of-year adjusting entry is made, the Allowance for Doubtful Accounts has a $1,950 credit balance at December 31.

Required:
1.	Prepare the November adjusting entry for bad debts. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

2. Prepare a schedule to estimate an appropriate year-end balance for the Allowance for Doubtful Accounts.

3.	Prepare the December 31 adjusting entry. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) 4. Show how the various accounts related to accounts receivable should be shown on the December 31 balance sheet.

Answer 1

1) Adjusting entry :

Date	account and explanation	debit	credit
	Bad debt expense (120000*1%*1/4)	300
	Allowance for doubtful accounts		300
	(To record bad debt expense)

2. Prepare a schedule to estimate an appropriate year-end balance for the Allowance for Doubtful Accounts.

Days	Amount	Percent uncollectible	Amount uncollectible
1-30	82000	11%	9020
31-90	11000	22%	2420
More than 90	4700	44%	2068
Total			13508

3) Adjusting entry :

Date	account and explanation	debit	credit
	Bad debt expense (13508-1950)	11558
	Allowance for doubtful accounts		11558
	(To record bad debt expense)

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

Current assets
Account receivable	97700
Less; Allowance for doubtful accounts	-13508	84192