The Brown Company sells small office equipment and fixtures on credit. Their end

Question

The Brown Company sells small office equipment and fixtures on credit. Their ending balance in Accounts Receivable for 2014 was $120,000. It was expected that $5,000 of this balance would later prove to be uncollectible, so Brown set up an Allowance for Doubtful Accounts for $5,000, and declared $5,000 as Bad Debts Expense for 2014. In June of 2015, Brown determined that a $1,285 receivable owed by Molly Quinn should be written off. Discuss the impact that this June write off action will have on Brown's Net Income for 2014 and 2015, and explain your answer.

Explanation / Answer

For net income of 2014 there will be no impact on write off of $ 5000 as the balance of $ 5000 is already available in allowance for doubtful debts account.

As we can see the write off of $ 5000 in the year 2014 has left no balance in allownace for doubtful debts accounts as at the opening date of the year 2015. Hence for a write off of $ 1285 in the year 2015 would require a debit entry to the profit and loss account for $ 1285 to create allowance for such amount. Thus the net income of year 2015 would reduce to that extent.

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