Question

On June 20 of the prior year, a company determined that a customer's account receivable was uncollectible and that the account should be written off. Unexpectedly, on September 1 of the current year, the customer paid the account in full. Assuming the allowance method is used to account for bad debts, what effect will this recovery have on the company's net income and total assets?

A. No effect on net income; decrease in total assets
B. No effect on net income; no effect on total assets (chosen answer)
C. Increase in net income; no effect on total assets
D. Decrease in net income; no effect on total assets
E. Decrease in net income; decrease in total assets

Answer 1

B. No effect on net income; no effect on total assets

Step-by-step explanation:

When you write off bad debt, the journal entry is:

Dr Allowance for doubtful accounts XYZ

Cr Accounts receivable XYZ

This actually had no effect on the income statement, since the allowance account is already a contra asset account.

When the write off is reversed because the customer paid the debt, the journal entry is:

Dr Accounts receivable XYZ

Cr Allowance for doubtful accounts XYZ

Dr Cash XYZ

Cr Accounts receivable XYZ

Again, since the company is using the allowance method, there is no real effect on the income statement nor total assets in the balance sheet.