Innovative Tech (ITI) uses the percentage of credit sales method to estimate bad
ID: 2434915 • Letter: I
Question
Innovative Tech (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 2010 iti sold services on account for $100,000 and estimated that .5% 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 uncollectibility is (1) 1 percent (2) 15 percent and (3) 40 percent respectively, before the end of year adjusting entry is made, the allowance for doubtful accounts has a $1,600 credit balance at december 31, 2010.1. prepare the november 2010 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, 2010 adjusting entry
4. show how the various accounts related to accounts receivable should be shown on the december 31, 2010 balance sheet.
Explanation / Answer
1. prepare the november 2010 adjusting entry for bad debts. Bad debts Expenses $500 Allowance for doubtful debts $500 2. prepare a schedule to estimate an appropriate year-end balance for the allowance for doubtful accounts. 1-30 days 31-90 days more the 90 days Amount outstanding 75,000 10,000 4,000 % applied 1 15 40 Allowance for doubtful debts 750 1,500 1,600 Total Amount for Allowance for doubtful debts $3,850 3. prepare the December 31, 2010 adjusting entry Bad debts Expenses $2,250 Allowance for doubtful debts $2,250 4. show how the various accounts related to accounts receivable should be shown on the december 31, 2010 balance sheet. Accounts receivable $89,000 Less; Allowance for doubtful debts $ 3,850 $85,150