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?

To calculate the necessary adjustment for the Allowance for Doubtful Accounts (AFDA), we need to determine the required ending balance for the AFDA using the percentage of receivables method.

Given:

Accounts receivable balance = $170,000

Credit sales = $1,710,000

Estimated uncollectible accounts = 5% of accounts receivable

Calculate the required ending balance for the AFDA:

Estimated uncollectible accounts = 5% of $170,000 = 0.05 * $170,000 = $8,500

Determine the necessary adjustment:

Required adjustment = Required ending balance - Existing credit balance

Required adjustment = $8,500 - $3,400 = $5,100

Now, to adjust the Allowance for Doubtful Accounts to its required ending balance, Cheyenne Corp. will make the following adjusting entry:

Adjusting Entry:

Debit : Bad Debts Expense = $5,100

Credit: Allowance for Doubtful Accounts=$5,100

This adjusting entry increases the Bad Debts Expense by $5,100 and increases the Allowance for Doubtful Accounts by the same amount to achieve the necessary balance of $8,500 in the allowance, reflecting the estimated uncollectible accounts based on the percentage of receivables method.