Question 7

Increase in cash and increase in allowance for doubtful accounts

When a previously written-off account is recovered under the allowance method, cash is increased, and the allowance for doubtful accounts is also increased to reflect the recovery.

A) Increase in cash and increase in retained earnings

This option is incorrect because while cash does increase upon recovery, the retained earnings are not directly affected by the recovery of an account written off as uncollectible. The transaction primarily impacts the allowance account and not retained earnings.

B) Increase in cash and decrease in bad debt expense

This option is incorrect as there is no decrease in bad debt expense when a previously written-off account is collected. The recovery affects cash and the allowance for doubtful accounts but does not change the bad debt expense recognized in prior periods.

C) Increase in cash and increase in allowance for doubtful accounts

This option is correct because when a previously uncollectible account is recovered, cash is received, and the allowance for doubtful accounts is increased to reflect the fact that the account has been reinstated. This aligns with the accounting principles associated with the allowance method.

D) Increase in cash and decrease in loss from bad debt

This option is incorrect because recovering a previously written-off account does not decrease the loss from bad debt. The loss was already recognized when the account was initially written off, so this recovery does not retroactively change that loss.

Conclusion

Option C is definitively correct as it accurately describes the accounting treatment for the recovery of a previously written-off account under the allowance method. All other options either misrepresent the effects on financial statements or fail to recognize the proper accounting entries involved in such a recovery.