Question

Which of the following circumstances would not affect net income?

(i) Factoring receivables without recourse

(ii) Writing off receivables under the direct write-off method

(iii) Collecting previously written off receivables under the allowance method

(iv) Writing off receivables under the allowance method

Answer 1

Correct Option iii) i.e. Collecting previously written off receivable under the allowance method.

Reason: When a previously written off accounts receivable is collected the first to reinstate Accounts Receivable is debited and Allowance account is credited. and thereafter Cash is debited and Accounts receivable is credited. We can see that all three accounts affected by this entry are only balance sheet accounts and not income statement account hence by these entry net income would not be affected at all.