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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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( Appendix 5A) Sales Discounts

Sims Company regularly provides services to Lauber Supply on terms 1/15, n/30 and records sales at gross. During a recent month, the two firms engaged in the following transactions:

a. Sims provided services with a list price of $85,000.

b. Sims provided services with a list price of $30,000.

c. Lauber paid for the purchase in Transaction a within the discount period.

d. Lauber paid for the purchase in Transaction b after the discount period.

Required:

1. Prepare the journal entries for Sims to record the sales in Transactions a and b (make separate entries).

2. Prepare the journal entry to record the receipt of Lauber’s payment in Transaction c.

3. Prepare the journal entry to record the receipt of Lauber’s payment in Transaction d.

4. CONCEPTUAL CONNECTION What implied annual interest rate is Lauber incurring by failing to take the sales discount and, instead, paying the gross amount after 30 days?

To determine

(a)

Sales discounts:

The term 1/15,n/30 means that if a customer is paying in 15 days then the payment will be after a discount of 1% on the total value but if the customer is paying in 30 days then the payment will be made in full which means no discount.

Gross method:

Under this method, the revenues are recorded at gross amount of sales i.e. without taking the effect of any discount at the time of sales.

The journal entries for Sims for recording the sales at gross.

Explanation

The Sims provided two services. One at the amount of $85,000 and the other at the amount of $30,000 that is the list price. This is given in the question.

The journal entry for Sims at the gross amount is as follows:

Date Particulars Debit ($) Credit ($)
Accounts Receivable…………………… Sales…………………………………(Record the sales service   
To determine

(b)

Sales discounts:

The term 1/15,n/30 means that if a customer is paying in 15 days then the payment will be after a discount of 1% on the total value but if the customer is paying in 30 days then the payment will be made in full which means no discount.

Gross method:

Under this method, the revenues are recorded at gross amount of sales i.e. without taking the effect of any discount at the time of sales.

The journal entry for the receiving payment within 15 days.

To determine

(c)

Sales discounts:

The term 1/15,n/30 means that if a customer is paying in 15 days then the payment will be after a discount of 1% on the total value but if the customer is paying in 30 days then the payment will be made in full which means no discount.

Gross method:

Under this method, the revenues are recorded at gross amount of sales i.e. without taking the effect of any discount at the time of sales.

The journal entry for the receiving payment after 15 days.

To determine

(d)

Sales discounts:

The term 1/15,n/30 means that if a customer is paying in 15 days then the payment will be after a discount of 1% on the total value but if the customer is paying in 30 days then the payment will be made in full which means no discount.

To calculate:

The implied annual interest rate which the Lauber has to incur after failing to take benefit of sale discount.

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