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

For November 2013, ITI needs to record a bad debt expense of $500. By year-end, the allowance account needs an additional $9,500 to reach the estimated balance of $11,100. These adjustments ensure the balance sheet reflects the net realizable value of accounts receivable at $77,900.

Step-by-step explanation:

November 2013: Adjusting Entry for Bad Debts

To record the adjusting entry for bad debts for November 2013, where ITI estimated half of one percent (0.5%) of credit sales would be uncollectible on sales of $100,000, the calculation would be:

$100,000 × 0.005 = $500

The adjusting entry would then be:

Bad Debt Expense: $500
Allowance for Doubtful Accounts: $500

Year-End Balance Estimation for Allowance for Doubtful Accounts

This schedule is based on the aging of accounts receivable:

• 
  
• 1–30
• 
  
• 
  

Total estimated bad debts: $7,500 + $2,000 + $1,600 = $11,100

December 31, 2013: Adjusting Entry

At year-end, we compare the calculated value for the estimated bad debts ($11,100) with the existing credit balance in the allowance for doubtful accounts ($1,600). The adjusting entry would be the difference:

Bad Debt Expense: $9,500
Allowance for Doubtful Accounts: 9,500

Accounts Related to Accounts Receivable on the Balance Sheet

On the December 31, 2013 balance sheet, the accounts related to accounts receivable would appear as follows:

• 
  
• Accounts Receivable: $89,000
• 
  
• Less: Allowance for Doubtful Accounts: $11,100

Net Accounts Receivable: $77,900