Adjusting the allowance for irrecoverable debts

Steps:

• Calculate required allowance: 5% × $2000 =$100.

• Compare to draft allowance: $3000 -$100 = $2900 overprovision.

• Journal entry: Debit allowance $2900, credit bad debt expense$2900.

• Effect: Increases profit by $2900 (lower expense) and net current assets by$2900 (lower contra asset).

Why D is correct:

• Reducing the overprovision increases profit and net current assets per the matching principle in accounting, with D matching the direction of change.

Why the others are wrong:

• A: Wrong direction; adjustment increases, not decreases, both.

• B: Wrong direction for relative magnitudes; effects are equal, not doubled.

• C: Wrong direction; adjustment increases, not decreases, both.

Not enough information to match exact amounts in options.

Final answer: Not enough information.