Question

L Company has an accounts receivable balance of $50,000 and an allowance for doubtful accounts balance of $4,000 at the end of June before evaluating accounts receivable for collectability.   When L evaluated its accounts receivable, L determined a $3,000 account from a March sale to Andrea Company was uncollectable and wrote off this amount. What was the impact on L's June net income?

A$3,000 income that increased June net income

B$3,000 bad debt expense that reduced June net income

C$0 impact to net income

D$4,000 bad debt expense that reduced June net income

Answer 1

· When allowance method is in use, and certain account receivables are written off, the Net Income remains UN-AFFECTED.

· This is because, when accounts are written off:
Allowance account is debited, and
Account receivables is credited.

· Both – Allowance account and Account receivables account are BALANCE SHEET account and neither of them are Income Statement account.

· Hence, the Net Income remains un-affected.

· Correct Answer = Option ‘C’ $ 0 Impact to Net Income.