Garla Company reports the following financial information before adjustments. Dr. Cr. Accounts Receivable $145,600 Allowance for Doubtful Accounts $3,350 Sales Revenue (all on credit) 834,000 Sales Returns and Allowances 53,540

Prepare the journal entry to record bad debt expense assuming Carla Company estimates bad debts at (a) 4% of accounts receivable and (b) 4% of accounts receivable but Allowance for Doubtful Accounts had a $1,570 debit balance.

The following journal entries apply:

a) Debit Bad debt expense                                    $33,692.4  

   Credit Allowance for doubtful accounts           $33,692.4

b) Debit Bad debt expense                                    $38,612.4  

   Credit Allowance for doubtful accounts            $38,612.4

Explanation:

All the sales revenue are on credit to the tune of $834,000, however, there was sales return and allowance of $53,540, which has to be deducted from credit sales to arrive at the net credit sales of $780,460. This amount would be added to the accounts receivable of $145,600 to arrive at the total accounts receivable of $926,060.

a) 4% of $926,060 is $37,042.4. With credit balance of $3,350 in allowance for doubtful accounts, bad debt expense (addition) is $33,692.4  ($37,042.4 - $3,350).

b) 4% of $926,060 is $37,042.4 and there is a debit balance of $1,570 in allowance for doubtful accounts, bad debt expense (to reinstate allowance account to $37,042.4) is $38,612.4 ($37,042.4 + $1,570).

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