Cheyenne Corp. uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $170000 and credit sales are $1710000. Management estimates that 5% of accounts receivable will be uncollectible. What adjusting entry will Cheyenne Corp. make if the Allowance for Doubtful Accounts has a credit balance of $3400 before adjustment?

a. Bad Debt Expense 5100 Allowance for Doubtful Accounts 5100

b. Bad Debt Expense 5100 Accounts Receivable 5100 34200

c. Bad Debt Expense 34200 Accounts Receivable

d. Bad Debt Expense 34200 Allowance for Doubtful Accounts 34200

a. Bad Debt Expense 5100 Allowance for Doubtful Accounts 5100

Explanation:

The adjusting entry is shown below:

Bad debt expense $5,100

To Allowance for doubtful debts $5,100

(Being the bad debt expense is recorded)

The computation is shown below:

= Account receivable * estimated percentage - credit balance of allowance for doubtful debts

= $170,000 * 5% - $3,400

= $8,500 - $3,400

= $5,100

In order to recording this transaction, we debited the bad debt expense as it increases the expenses account whereas at the same time it reduces the account receivable therefore the allowance for doubtful debts is credited