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 2013, ITC sold services on account for $100,000 and estimated that ½ of one percent of those sales would be uncollectible. 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. Experience has shown that for each age group, the average rate of uncollectable is (1) 10 percent, (2) 20 percent and (3) 40 percent, respectively. Before the end of the year adjusting entry is made, the Allowance for Doubtful Accounts has a $1,600 credit balance at December 31, 2013.
Required:

1. Prepare the November 2013 adjusting entry for bad debts.

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

3. Prepare the December 31, 2013.

4. Show the various accounts related to accounts receivable should be shown on the December 31, 2013, balance sheet.

Answer 1

Answer:

The answer is given below;                                            

Explanation:

1. $100,000*.5%=$500

Bad Debt Expense Dr.$500

Allowance for Bad Debt Cr.$500

2. 1-30 days   $75,000*10%=7,500

   31-90 days  $10,000*20%=2,000

   More than 90 days $4,000*40%=1,600

Total Allowance for Doubtful Accounts-Closing=$11,100

3.  Adjusting entry for December 31,2013

Opening Balance      ($1,600)

Closing balance         $11,100

Allowance for the year $9,500

Bad Debt Expense Dr.$9,500

Account Receivable  Cr.$9,500

4. Allowance for Doubtful Accounts  $11,100