Answer: The following journal entries apply:
a) Debit Bad debt expense $32,727.6
Credit Allowance for doubtful accounts $32,727.6
b) Debit Bad debt expense $37,017.6
Credit Allowance for doubtful accounts $37,017.6
Explanation: All the sales revenue are on credit to the tune of $806,700, however, there was sales return and allowance of $51,060, which has to be deducted from credit sales to arrive at the net credit sales of $755,640. This amount would be added to the accounts receivable of $132,800 to arrive at the total accounts receivable of $888,440.
a) 4% of $888,440 is $35,537.6. With credit balance of $2,810 in allowance for doubtful accounts, bad debt expense (addition) is $32,727.6 ($35,537.6 - $2,810).
b) 4% of $888,440 is $35,537.6 and there is a debit balance of $1,480 in allowance for doubtful accounts, bad debt expense (to reinstate allowance account to $35,537.6) is $37,017.6 ($35,537.6 + $1,480).
