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 $100,000 and estimated that ½ 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 $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.

Answer 1

Answer:

1. See explanation section

2. Allowance for Doubtful Accounts = $11,100

Explanation:

Requirement 1

November, 20XX   Bad debt expense   Debit           $500

                               Allowance for doubtful accounts  Credit    $500

Note: ITI sold $100,000 worth of services. $\frac{1}{2}$ of 1% of those sales services would be uncollectible. It means, $100,000 × $\frac{1}{2}$ × 1% = $50,000 × 0.01 = $500 is bad debt expense. Since the company uses the percentage of credit sales method, so, they use sales amount to find the bad debt expense. Since it is written-off, Allowance for doubtful accounts is credit.

Requirement 2

The following schedule is an appropriate balance for the allowance for doubtful accounts:

Age                          Amount        Percentage       Total Amount

1–30 days old         $75,000             10%                  $7,500

31–90 days old       $10,000             20%                  $2,000

90 days+                 $4,000               40%                  $1,600

Allowance for Doubtful Accounts                          = $11,100