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?

No effect on net income; decrease in total assets

No effect on net income; no effect on total assets (chosen answer)

Increase in net income; no effect on total assets

Decrease in net income; no effect on total assets

Decrease in net income; decrease in total assets

Answer 1

Answer

• Correct Answer = Option #2: No effect on Net Income, and No Effect on Total Assets.
• Under Allowance method,
  final write off accounts does not affect net income and hence recovery will also not affect the net income.
  Increase in Total Assets (Cash) = Decrease in Total Assets (Accounts receivables) = NO effect on Total Assets.
• This can be explained through following example of assumed amounts

	Balance before recovery (assumed)	Re instated	Cash Collected	Balance after recovery
Accounts receivables	$400,000	$5,000	($5,000)	$400,000
Allowance account	($20,000)	($5,000)	$0	($25,000)
Cash	$0		$5,000	$5,000
Total Assets	$380,000	$0	$0	$380,000 [same as beginning]