[abstruse]

Q) The net effect of the entries to recognize the collection of a previously written-off account under the allowance method will

A. increase total assets and total equity
B. increase total equity only.
C. decrease total assets
D. have no effect on total assets or total equity

I think the answer is D. But can someone help explain the solution.

[morgaine300]

There are two steps in collecting a previously written off account:

1) Reinstating the account. This is a reversal of the entry to write off the account. Writing off an account (and therefore the reversal of it) does not affect net realizable value. Keep in mind that net realizable value (NRV) is accounts receivable less the allowance account. The reason it is not affected by a write-off is because the net realizable value is what you think you will realize (collect) from the receivables. An account you write off is not part of that number -- it's part of the part you think you won't get.

For instance, if receivables is 100,000 and your allowance is 2000, you have a net realizable value of 98,000. That's the part you think you will collect. If I write off an account of 500, receivables reduces to 99,500 and allowance reduces to 1500, and the net of that is still 98,000. That's because it was never part of that number to begin with, so writing it off doesn't affect it.

Likewise, reversing that to reinstate an account won't affect it either.

If the net isn't affect, then likewise current assets and total asset aren't affected. The short answer is also that the reinstatement debits & credits the same amount to assets, which never changes the total of them, and does not involve other accounts such as equity.

2) Keeping in mind that our written off account is now back in receivables, collecting on a receivable is merely the exchange of one asset for another. We had a receivable. We now have cash. Both current assets that are just an exchange. So assets don't change and nothing else is involved.