Adjust profit for ending doubtful debts allowance and bad debt recovery

Steps:

• Compute ending allowance: 2% of $20,000 trade receivables =$400 bad debt expense.
• Record recovery: $4,000 as income (previously written-off debt).
• Net adjustment to draft profit: -$400 +$4,000 = +$3,600.
• Revised profit: $6,000 +$3,600 = $9,600.

Why D is correct:

• Bad debt expense equals the full ending allowance required (2% of ending receivables) under the percentage-of-receivables method, with recovery as separate income.

Why the others are wrong:

• A: Likely subtracts recovery from allowance without netting properly ($6,000 -$400 + $2,000?).
• B: Treats recovery as expense or ignores it ($6,000 +$200?).
• C: Uses change in allowance ($100 expense) plus partial recovery ($6,000 - 2,400?).

Final answer: D