Allowance Adjustment Increases Profit Due to Lower Receivables

Steps:

• Calculate previous year's receivables: $8000 is 20$8000 / 0.8 = $10,000.
• Compute prior allowance: 5% of $10,000 =$500.
• Compute current allowance: 5% of $8000 =$400.
• Determine change: Allowance decreases by $100, reducing bad debt expense and increasing profit by$100.

Why C is correct:

• Under the allowance method, a decrease in the required allowance credits the bad debt expense account, directly increasing net profit by the adjustment amount.

Why the others are wrong:

• A: Assumes $100 decrease in profit, ignoring the expense reduction.
• B: Assumes $400 decrease, possibly confusing full current allowance with change.
• D: Assumes $400 increase, mistaking current allowance for the adjustment benefit.

Final answer: C