Matsuzaka Company uses the allowance method to account for uncollectible accounts. An account that had been previously written-off as uncollectible was recovered. How would the recovery affect the company's accounting equation

A. Increase assets and Increase equity
B. Increase assets and decrease liabilities
C. Reduce liabilities and increase equity
D. Have no effects on liabilities, assets, or equity

D. Have no effects on liabilities,assets,or equity

Explanation:

The Entry for recovered written-off account receivable is

Dr. Cash                                           $xxx

Cr. Allowance for Doubtful debts  $xxx

Debit Entry in the cash account will increase the assets balance. Credit entry in the Allowance account will reduce the balance of a contra asset account. which is adjusted in the receivable balance to calculate the net receivable balance. Increase in one asset as cash and decrease in other as account receivable will result in net impact of zero.

So overall there is no impact on the Assets, Equity and Liability of the company.

D) Have no effects on liabilities, assets, or equity

Explanation:

When a previously written off account receivable is collected, you must record two separate journal entries. The first one should reverse the write off:

Dr Accounts receivable XYZ

    Cr Allowance for doubtful accounts XYZ

Then you record the cash collection:

Dr Cash XYZ

    Cr Accounts receivable XYZ

Since both cash and accounts receivable are asset accounts, the collection of the money will not change anything, since one asset account decreases, while the other one increases.

Allowance for doubtful accounts is a contra asset account, so the reversal of the write off will not alter accounts receivable either, because you are adding to it and at the same type subtracting from it.  

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