Question

At the beginning of the year, the balance of accounts receivable was $200,000 and the balance of allowance for doubtful debts was $12,000. During the year, $500 bad debt had been written off. What would be the effect of the bad debt write-off on the recoverable amount in the statement of financial position (Ignore GST)?

Select one:
a. The recoverable amount would increase by $500
b. The recoverable amount would remain the same
c. The effect on recoverable amount could not be determined
d. The recoverable amount would decrease by $500

Answer 1

Writing off a $500 bad debt reduces both the accounts receivable and allowance for doubtful debts by $500, leaving the net recoverable amount unchanged. Therefore, the correct answer to the question is b. The recoverable amount would remain the same.

Step-by-step explanation:

When a bad debt of $500 is written off, the balance in the 'allowance for doubtful debts' account is reduced by the amount of the written-off bad debt. The accounts receivable balance is also reduced by the $500 written off. The 'recoverable amount' in the statement of financial position reflects the net value of the accounts receivable after deducting the allowance for doubtful debts.

As both the accounts receivable and allowance for doubtful debts are reduced by the same amount ($500), the net effect on the recoverable amount is zero. Therefore, the correct answer to the question is b. The recoverable amount would remain the same.