Final answer:
Under the Allowance Method, the year-end adjusting entry for bad debts depends on the prior balance in the Allowance account and typically results in no change to total assets, but a decrease in net income due to the recognition of Bad Debt Expense.
Step-by-step explanation:
When using the Allowance Method for accounting for bad debts, the year-end adjusting entry is to account for the estimated uncollectible accounts. This adjustment typically involves debiting Bad Debt Expense and crediting Allowance for Doubtful Accounts, which is a contra-asset account. The correct answer to the student's question is B) It depends on the balance in the Allowance account before we make the entry. If the Allowance for Doubtful Accounts has a credit balance, the adjusting entry increases the total balance in this account and reduces net income because Bad Debt Expense is recognized. However, the total amount of assets remains the same since we're adjusting against an existing allowance, not directly writing off an asset. If the Allowance account has a debit balance (an unusual circumstance), the adjusting entry would have to bring this account back to a credit balance to properly account for estimated bad debts.
In summary, when the adjusting entry for bad debts is made, assets stay the same, since the actual reduction of accounts receivable will occur when specific debts are deemed uncollectible and written off against the allowance account. The net income decreases due to the recognition of the bad debt expense, which might be offset if there is already a debit in the allowance account.