E8-8 (Algo) Recording and Reporting Allowance for Doubtful Accounts Using the Percentage of Credit Sales and Aging of Accounts Receivable Methods [LO 8-2]

Innovative Tech Incorporated (ITI) has been using the percentage of credit sales method to estimate bad debts. During November, ITI sold services on account for $140,000 and estimated that 1/2 of 1 percent of those sales would be uncollectible.

Required:

the November adjusting entry for bad debts.

Starting in December, ITI switched to using the aging method. At its December 31 year-end, total Accounts Receivable is $86,800, aged as follows: (1) 1 to 30 days old, $73,000; (2) 31 to 90 days old, $10,000; and (3) more than 90 days old, $3,800. The average rate of uncollectibility for each age group is estimated to be (1) 10 percent, (2) 20 percent, and (3) 40 percent, respectively. Create a schedule to estimate an appropriate year-end balance for the Allowance for Doubtful Accounts.

Before the end-of-year adjusting entry is made, the Allowance for Doubtful Accounts has a $1,500 credit balanceont December 31. Prepare the December 31 adjusting entry.

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