Indigo Company reports the following financial information before adjustments.

Dr. Cr.

Accounts Receivable $132,500

Allowance for Doubtful Accounts $3,970

Sales Revenue (all on credit) 838,100

Sales Returns and Allowances 50,780

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.

DR. CR.

(a)

Bad Debt Expense $1,330

Allowance for Doubtful Accounts $1,330

(b)

Bad Debt Expense $6,870

Allowance for Doubtful Accounts $$6,870

Explanation:

Explanation:

a)

Allowance for Doubtful Accounts for the year = Closing Account receivable x Rate of Allowance = $132,500 x 4% = $5,300

Allowance for Doubtful Accounts already has credit balance of $3,970 so the net value of $1,330 ($5300 - $3,970) is adjusted in the journal entry.

b)

As the Allowance for Doubtful Accounts already had debit balance of $1,570but we have to make it as $5,300 credit balance because this is the contra asset account which normally has credit balance.

Adjustment amount = $5,300 + $1,570 = $6,870