Adjusting provision for doubtful debts Steps:

• Calculate required provision: 5% × $4,000 trade receivables =$200.
• Compare to current provision: $200 -$40 = $160 increase needed.
• Debit bad debt expense $160 and credit provision for doubtful debts$160.
• This expense appears in the income statement as an operating cost.

Why A is correct:

• Bad debt expense equals the provision increase to reach 5% of receivables ($200 -$40 = $160), following accrual accounting rules for estimated uncollectible amounts.

Why the others are wrong:

• B. $800 expense: Overstates the adjustment; implies 5$16,800).

Final answer: A