Innovations Corp (IC) uses the percentage of credit sales method to estimate bad debts each month and then uses the aging method at year-end. During November 2020, IC 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 to 30 days old, $75,000; (2) 31 to 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, 2020.
Innovations Corp (IC) uses the percentage of credit sales method to estimate bad debts each month and then uses the aging method at year-end. During November 2020, IC 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 to 30 days old, $75,000; (2) 31 to 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, 2020.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
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Transcribed Image Text:Innovations Corp (IC) uses the percentage of credit sales method to estimate bad debts each month and then uses the aging method
at year-end. During November 2020, IC sold services on account for $100,000 and estimated that 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 to 30 days old,
$75,000; (2) 31 to 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, 2020.
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