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Sheffield Corp. uses the percentage-of-receivables basis to record bad debt expense and concludes that 3% of accounts receivable will become uncollectible. Accounts receivable are $430,800 at the end of the year, and the allowance for doubtful accounts has a credit balance of $2,864. (a) Prepare the adjusting journal entry to record bad debt expense for the year. (b) If the allowance for doubtful accounts had a debit balance of $887 instead of a credit balance of $2,864, prepare the adjusting journal entry for bad debt expense.

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Answer and Explanation:

The journal entries are shown below:

a. Bad-debt expense A/c [($430,800 × 3%) - $2,864] Dr. $10,060

              To Allowance for doubtful accounts A/c   $10,060

 (Being bad-debts expense is recorded)

Here the bad debt expense is debited as it increased the expense and credited the allowance as it decreased the assets

b. Bad-debt expense A/c [($430,800 × 3%) + $887] Dr. $13,811

              To Allowance for doubtful accounts A/c   $13,811

 (Being bad-debts expense is recorded)

Here the bad debt expense is debited as it increased the expense and credited the allowance as it decreased the assets