Chapter 6, Problem 5E

1 (a)

To determine

Journalize entries to record accounts receivable and sales at gross price.

Explanation of Solution

Accounts receivable:

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Journal entry:

Journal entry is a “set of economic events” which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains

Record the journal entry:

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
February 1	Accounts receivable	13,000
	Sales revenue		13,000
	( To record the sale on February 1)

Table (1)

• Accounts receivable is an asset and it is increased. Therefore, debit accounts receivable account by $13,000.
• Sales revenue is a component of stockholders equity and it is increased. Therefore, credit sales revenue account by $13,000.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
February 10	Cash (2)	7,425
	Sales revenue (1)	75
	Accounts receivable		7,500
	( To record payment received)

Table (2)

• Cash is an asset and it is increased. Therefore, debit cash account by $7,425.
• Sales revenue is a component of stockholders’ equity and it is decreased. Therefore, debit sales revenue account by $75.
• Accounts receivable is an asset and it is decreased. Therefore, credit accounts receivable account by $7,500.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
March 1	Cash (3)	5,500
	Accounts receivable		5,500
	( To record payment received)

Table (3)

• Cash is an asset and it is increased. Therefore, debit cash account by $5,500.
• Accounts receivable is an asset and it is decreased. Therefore, credit accounts receivable account by $5,500.

Working notes:

(1) Calculate the amount of sales revenue on February 10:

$\begin{array}{c}\text{Sales}\text{revenue}\text{=}\text{Accounts}\text{receivable}\text{×}\text{Discount}\text{rate}\\ \text{=}\text{\$7,500}\text{×1\%}\\ \text{=\$75}\end{array}$

(2) Calculate the amount of cash received on February 10:

$\begin{array}{c}\text{Cash}\text{=}\text{Accounts}\text{receivable}-\text{Sales}\text{revenue}\\ \text{=}\text{\$7,500}-\text{\$75}\\ \text{=\$7,425}\end{array}$

(3) Calculate the amount of cash received on March 1:

$\begin{array}{c}\text{Cash}\text{=}\text{listing}\text{price}\text{of}\text{merchandise}\text{sold}-\text{Accounts}\text{receivable}\\ \text{=}\text{\$13,000}-\text{\$7,500}\\ \text{=\$5,500}\end{array}$

Note: In this case, $\frac{1}{10}$ (1 %) discount is given for accounts receivable, if it is paid within 10 days.

1 (b)

To determine

Journalize entries to record accounts receivable and sales at net price.

Explanation of Solution

Record the journal entry:

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
February 1	Accounts receivable	12,870
	Sales revenue (4)		12,870
	( To record sales on February 1)

Table (4)

• Accounts receivable is an asset and it is increased. Therefore, debit accounts receivable account by $12,870.
• Sales revenue is a component of stockholders equity and it is increased. Therefore, credit sales revenue account by $12,870.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
February 10	Cash (5)	7,425
	Accounts receivable		7,425
	( To record payment received)

Table (5)

• Cash is an asset and it is increased. Therefore, debit cash account by $7,425.
• Accounts receivable is an asset and it is decreased. Therefore, credit accounts receivable account by $7,425.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
March 1	Cash (6)	5,500
	Sales revenue (7)		55
	Accounts receivable (8)		5,445
	( To record payment received)

Table (6)

• Cash is an asset and it is increased. Therefore, debit cash account by $5,500
• Sales revenue is a component of stockholders’ equity and it is decreased. Therefore, debit sales revenue account by $55.
• Accounts receivable is an asset and it is decreased. Therefore, credit accounts receivable account by $5,445.

Note: In this case, $\frac{1}{10}$ (1 %) discount is given for accounts receivable, if it is paid within 10 days.

Working notes:

(4) Calculate the amount of sales revenue on February 1:

$\begin{array}{c}\text{Sales}\text{revenue}\text{=}\left[\begin{array}{l}\text{Accounts}\text{receivable}-\\ \left(\text{Discount}\text{rate}\times \text{Accounts}\text{receivable}\right)\end{array}\right]\\ \text{=}\left[\$13,000-\left(1\%\times \$13,000\right)\right]\\ \text{=\$12,870}\end{array}$

(5) Calculate the amount of cash received on February 10:

$\begin{array}{c}\text{Cash}\text{=}\left[\begin{array}{l}\text{Accounts}\text{receivable}-\\ \left(\text{Discount}\text{rate}\times \text{Accounts}\text{receivable}\right)\end{array}\right]\\ \text{=}\left[\$7,500-\left(1\%\times \$7,500\right)\right]\\ \text{=\$7,425}\end{array}$

(6) Calculate the amount of cash received on March 1:

$\begin{array}{c}\text{Cash}\text{=}\text{listing}\text{price}\text{of}\text{merchandise}\text{sold}-\text{Accounts}\text{receivable}\\ \text{=}\text{\$13,000}-\text{\$7,500}\\ \text{=\$5,500}\end{array}$

(7) Calculate the amount of sales revenue on March 1:

$\begin{array}{c}\text{Cash}\text{=}\left[\begin{array}{l}\left(\text{listing}\text{price}\text{of}\text{merchandise}\text{sold}-\text{Accounts}\text{receivable}\right)\\ \text{×}\text{Discount}\text{rate}\end{array}\right]\\ \text{=}\left(\text{\$13,000}-\text{\$7,500}\right)\text{×}1\%\\ \text{=\$55}\end{array}$

(8) Calculate the amount of accounts receivable on March 1:

$\begin{array}{c}\text{Accounts}\text{receivable}\text{=}\text{Cash}-\text{Sales}\text{revenue}\\ \text{=}\text{\$5,500}-\text{\$55}\text{(7)}\\ \text{=\$5,445}\end{array}$

Note: In this case, $\frac{1}{10}$ (1 %) discount is given for accounts receivable, if it is paid within 10 days.

2.

To determine

State the Corporation E’s annual interest rate at which the customers fails to take the cash discount.

Explanation of Solution

Customers’ of Corporation E are incurring 18.25% of annual interest rate with a rate of discount at 1%, assuming a 365-day year by taking 20 days extra $\left(\text{30 days }-1\text{0 days}\right)$.

3.

To determine

State the method of recording accounts receivable that is theoretically superior.

Explanation of Solution

• Recording receivables at the net price is the “theoretically superior method” since; the receivable are valued at the net realizable value and it records sales revenue at the amount that a company anticipates to be allowed.
• If receivables are stated at their gross price, then sales revenue will be overstated.