Question

The occurrence which most likely would have no effect on 2020 net income (assuming that all amounts involved are material) is the

a. sale in 2020 of an office building contributed by a stockholder in 1983.
b. collection in 2020 of a receivable from a customer whose account was written off in 2019 by a charge to the allowance account.
c. settlement based on litigation in 2020 of previously unrecognized damages from a serious accident that occurred in 2018
d. worthlessness determined in 2020 of stock purchased on a speculative basis in 2016

Answer 1

The collection in 2020 of a receivable that was written off in 2019 would most likely have no effect on the 2020 net income because it simply reverses the write-off entries, with no impact on net income.

Step-by-step explanation:

The occurrence which most likely would have no effect on 2020 net income is the collection in 2020 of a receivable from a customer whose account was written off in 2019 by a charge to the allowance account. When a receivable is written off, the allowance for doubtful accounts is reduced, and the receivable is removed from the books. If the same receivable is later collected, it does not affect net income because the collection simply reverses the accounting entries made to write off the receivable, thereby increasing cash and decreasing the allowance for doubtful accounts with no impact on net income.

Other options, such as the sale of an office building, the settlement of litigation, or the declaration of stock as worthless involve recognitions of profit or loss and would normally affect the net income of 2020.