Innovative Tech Inc. (ITI) uses the percentage of credit sales method to estimate bad debts eachmonth and then uses the aging method at year-end. During November, ITI sold services on accountfor $100,000 and estimated that ½ of one percent of those sales would be uncollectible. At itsDecember 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 hasshown that for each age group, the average rate of uncollectibility is (1) 10 percent, (2) 20 percent,and (3) 40 percent, respectively. Before the end-of-year adjusting entry is made, the Allowance forDoubtful Accounts has a $1,600 credit balance at December 31.Required:1. Prepare the November 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 adjusting entry.4. Show how the various accounts related to accounts receivable should be shown on the December 31 balance sheet.
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.
Innovative Tech Inc. (ITI) uses the percentage of credit sales method to estimate
month and then uses the aging method at year-end. During November, ITI 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
$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) 10 percent, (2) 20 percent,
and (3) 40 percent, respectively. Before the end-of-year
Doubtful Accounts has a $1,600 credit balance at December 31.
Required:
1. Prepare the November 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 adjusting entry.
4. Show how the various accounts related to accounts receivable should be shown on the December 31 balance sheet.
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