ABC Corporation sold $10,000 in merchandise on account and expects 3% of sales will not be collected. Assume the current balance of the allowance for doubtful accounts is $100 (normal credit balance). ABC Corporation has a December 31 year end and made the appropriate adjusting journal entry on December 31, 2025 for bad debt expense. Early in 2026, a customer's uncollectible account for $100 is written off.

What impact does this write off have on net income?

Question

ABC Corporation sold $10,000 in merchandise on account and expects 3% of sales will not be collected. Assume the current balance of the allowance for doubtful accounts is $100 (normal credit balance). ABC Corporation has a December 31 year end and made the appropriate adjusting journal entry on December 31, 2025 for bad debt expense.  Early in 2026, a customer's uncollectible account for $100 is written off.

What impact does this write off have on net income?

BlackTom AI · Accepted Answer

Allowance method records estimated bad debts as an expense when the related sales are recognized, using a contra-asset account (Allowance for Doubtful Accounts) so that actual write-offs do not affect net income when they occur.

1. Relevant knowledge points and concepts
- Under the allowance method, bad debt expense is recorded by estimating uncollectible accounts and crediting the allowance for doubtful accounts (a contra-asset).
- Writing off a specific uncollectible account later reduces accounts receivable and the allowance, but does not create an additional expense if the allowance was previously established.
- Only the initial estimation (bad debt expense) affects net income.

2. Complete reasoning process step by step
- Sales on account = $10,000.
- Estimated uncollectible rate = 3% → required allowance = 0.03 × $10,000 = $300.
- Existing allowance (credit) before adjustment = $100.
- Adjusting entry on Dec 31, 2025 to reach required allowance: record bad debt expense for the difference.

3. Calculations and intermediate steps
- Required allowance = $10,000 × 3% = $300.
- Needed adjustment = required allowance − current allowance = $300 − $100 = $200.
- Adjusting journal entry (Dec 31, 2025): Debit Bad Debt Expense $200; Credit Allowance for Doubtful Accounts $200.
- Balance in allowance after adjustment = $100 + $200 = $300.
- Early 2026 write-off of a $100 uncollectible: Debit Allowance for Doubtful Accounts $100; Credit Accounts Receivable $100.
- Allowance after write-off = $300 − $100 = $200.

4. Why the correct answer is correct
- The $100 write-off in 2026 reduces the allowance and accounts receivable but does not create or increase expense at the time of write-off because the expense was already recognized ($200) in the December 31, 2025 adjusting entry. Therefore net income is not affected by the later write-off.

5. Why other options are incorrect
- Decrease by $100: Would be true under the direct write-off method (no prior allowance), but not under the allowance method used here.
- Decrease by $200, $300, $400: These confuse the adjusting entry amount or double-count the effect; only the $200 adjusting entry affected net income (in 2025), and the $100 write-off does not change net income in 2026.

6. Conclusion
- The write-off has no effect on net income, so the correct answer is $0, which matches the provided answer.

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