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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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Accounting for Cash (Sales) Discounts On December 1, 2019, Lynch Incorporated sold $18,000 of merchandise with terms 2/10, n/EOM, On December 11,2019, collections were made on sales originally billed for $12,000, and on December 31,2019, additional collections on sales originally billed for $5,000 were received.

Required:

  1. 1. Prepare the journal entries to record the sale, collections, and any required year-end adjustments assuming that Lynch records accounts receivable and sales at (a) the gross price and (b) the net price.
  2. 2. Next Level Assume that Lynch's customer does not have the available cash to pay Lynch within the discount period. How much interest should the customer be willing to pay for a loan to permit them to take advantage of the discount period (assume no additional costs to the loan)?
  3. 3. Next Level Explain why Lynch’s granting of cash (sales) discounts may improve cash flow.

1.

To determine

Prepare journal entry to record sales, collections and also pass necessary adjusting entry as Company L records accounts receivable and sales at (a) gross price (b) net price.

Explanation

Account receivable:

The amount of money to be received by a company for the sale of goods and services to the customers is referred to as account receivable.

(a) Prepare journal entry to record sales, collections and also pass necessary adjusting entry as Company L records accounts receivable and sales at gross price.

DateAccount Titles and explanationDebit ($)Credit ($)
December 1, 2019Accounts receivable18,000 
      Sales revenue 18,000
 (To record the sale made )  

Table (1)

  • Accounts receivable is an asset and there is an increase in the value of asset. Hence, debit the accounts receivable by $18,000.
  • Sales revenue is component of stockholder’s equity and there is an increase in the value of revenue. Hence, credit the sales revenue by $18,000.
DateAccount Titles and explanationDebit ($)Credit ($)
December 11, 2019Cash (1)11,760 
 Sales revenue ($12,000×2100)240 
      Accounts receivable 12,000
 (To record the sale made )  

Table (2)

  • Cash is an asset and there is an increase in the value of asset. Hence, debit the cash by $11,760.
  • Sales revenue is component of stockholder’s equity and there is a decrease in the value of revenue. Hence, debit the sales revenue by $240.
  • Accounts receivable is an asset and there is an increase in the value of asset. Hence, debit the accounts receivable by $12,000.
DateAccount Titles and explanationDebit ($)Credit ($)
December 31, 2019Cash5,000 
      Accounts receivable 5,000
 (To record the additional collection on the sales made)  

Table (3)

  • Cash is an asset and there is an increase in the value of asset. Hence, debit the cash by $5,000.
  • Accounts receivable is an asset and there is an increase in the value of asset. Hence, debit the accounts receivable by $5,000.

Working note:

(1) Calculate the cash to be received on sales made.

Cash  = (Original billing of  sales)×(100Percentage of discount100)=$12,000×(1002100)=$12,000×0.98=$11,760

Note: In this case, 210 (2 %) discount is given for accounts receivable, if it is paid within 10 days.

(b) Prepare journal entry to record sales, collections and also pass necessary adjusting entry as Company L records accounts receivable and sales at net price.

DateAccount Titles and explanationDebit ($)Credit ($)
December 1, 2019Accounts receivable17,640 
      Sales revenue 17,640
 (To record the sale made )  

Table (4)

  • Accounts receivable is an asset and there is an increase in the value of asset

2.

To determine

Identify the amount of interest the customer must be willing to pay for loan to take the advantage of the discount period.

3.

To determine

Describe the manner by which granting of discount on cash sales by Company L will improve cash flow.

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