Dishonored Cheque Adjustment for Irrecoverable Debt

Steps:

• Initial receipt: Debit Bank, Credit Peter (reduces accounts receivable).
• Cheque returned unpaid: Reverse overstated Bank by crediting it.
• Lack of funds indicates debt irrecoverability: Debit Irrecoverable Debts (expense account) to recognize loss.
• Combined entry corrects Bank and records bad debt without separate receivable reinstatement.

Why D is correct:

• Per accounting standards (e.g., IAS 39/IFRS 9), dishonored cheques due to insufficient funds require reversing the bank credit and charging the loss to bad debts expense directly.

Why the others are wrong:

• A: Debits Bank (worsens overstatement) and credits Irrecoverable Debts (reduces expense incorrectly).
• B: Assumes write-off to Peter but fails to reverse Bank entry, leaving cash overstated.
• C: Reinstate Peter and reverses Bank but ignores recognizing the debt as irrecoverable expense.

Final answer: D