Question

Cupcakes Inc. accounts for bad debts using the allowance method. On June 1, Cupcakes Inc. wrote off Andrew Green’s $2,500 account. Based on Cupcakes’s estimation, Andrew Green will never pay any portion of the balance in his account. What effect will this write-off have on Cupcakes Inc.’s balance sheet at the time of the write-off?

A)	an increase to stockholders’ equity and a decrease to liabilities

B)	an increase to assets and an increase to stockholders’ equity

C)

no effect

D)	a decrease to assets and a decrease to stockholders’ equity

Answer 1

At the time of write off following entry is passed:
Account titles & Explanations					debit	Credit
Allowance for dountful accounts					2,500
Account receivable						2,500
since the two accounts involved are asset account there will be no affect
on stockholder's equity and liability
As for assets the effect will be nil since allowance is an intra asset account
so decrease in allowance account is offset by decrease in accounts receivable
the net effect is nil
hence answer)		option c
		no effect