Monty Company reports the following financial information before adjustments. Dr. Cr. Accounts Receivable $132,800 Allowance for Doubtful Accounts $2,810 Sales Revenue (all on credit) 806,700 Sales Returns and Allowances 51,060 Prepare the journal entry to record bad debt expense assuming Monty Company estimates bad debts at (a) 4% of accounts receivable and (b) 4% of accounts receivable but Allowance for Doubtful Accounts had a $1,480 debit balance. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

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).