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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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In order to induce prompt payment, Swope Company offers a cash discount of 2% to customers who make payment on their account within 10 days of the invoice date. Swope’s bookkeeper is not sure how these discounts should be recorded.

Required:

  1. 1. Explain the methods of recording accounts receivable with cash discounts.
  2. 2. Discuss the theoretical soundness of each method.

1.

To determine

State the methods used to record accounts receivable with cash discounts.

Explanation

Methods used to record the accounts, if cash discounts are involved are as follows:

Gross price method:

  • It is the primary method of recording accounts receivable, if cash discounts are involved. In this method, amount of accounts receivable and sales are stated at the gross price. While using this method, both the accounts of accounts receivable and sales are recorded at the total invoice price, if there is no discount of cash is involved.
  • The company records the difference amount of cash received and original amount of accounts receivable as a debit to sales revenue. If the customer makes payment and take the cash discount allowable...

2.

To determine

Exhibit the theoretical soundness of each method.

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