Here's the problem and what I've done so far with it.

Prepare T accounts for Accounts Rec. and Allowance for Doubtful Accounts using the following information:

Hernandez Co had an Accounts Rec balance of $320,000 and a credit balance in Allowance for Doubtful Accounts of $16,700 at January 1, 20xx. During the year, the company recorded the following transactions:
- Sales on account, $1,052,000
- sales returns and allowances by credit customers, $53,400
- Collections from customers, $993,000
- Worthless accounts written off, $19,800
The company's past history indicates that 2.5 percent of its net credit sales will not be collected.

1. T account for Accounts Rec
(Debit)
Bal. $320,000
sales $1,052,000
(Credit)
Returns and allowances $53,400
Collections from cust. $993,000
Write-offs $19,800
(Debit balance: $305,800)

2. T account for Allowance for Doubtful Accounts
(Debit)
Write-offs $19,800
(Credit)
Bal. $16,700
(Debit balance: $3,100)

So, the second part is where I'm having problems. What am I supposed to do to make it so that there is a credit balance instead of a debit balance?

Do I figure out the net credit sales for the year and multiply by 2.5% to find the targeted balance? Then would I take that value and subtract $16,700 and enter that value as an adjustment? For example:

Net credit sales: $1,052,000 - $53,400 = $998,600
Target balance for allowance for doubtful accounts: $998,600 x 0.025 = $24,965
Adjustment: $24,965 - $16,700 = $8,265

So then the T account for doubtful accounts would look like:
(Debit)
Write-offs $19,800
(Credit)
Bal. $16,700
Dec. 31 adj $8,265
(Credit balance: $5,165)

I've worked on this all night last night and all morning today. I'm not sure if what I'm doing is the right thing as I can't find anything in the book that addresses the issue, and I'm not finding any help online either.

Thanks in advance!

You are using a balance sheet approach instead of income statement approach.

The Income Statement approach recognizes bad debt expense based on net credit sales. The ending balance in allowance account will accordingly change.

The Balance Sheet approach requires that the ending balance in allowance account be equal to the percentage of the balance in accounts receivable account.

Bad debts expense for the year will be $24,965 recorded as debits to Bad debts expense and credit to Allowance account. This will show a credit balance of $21,865 in the allowance account.