Trade and cash discounts; the gross method and the net method compared
• LO7–3
Tracy Company, a manufacturer of air conditioners, sold 100 units to Thomas Company on November 17, 2018. The units have a list price of $600 each, but Thomas was given a 30% trade discount. The terms of the sale were 2/10, n/30.
Required:
1. Prepare the
2. Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection on December 15, 2018, assuming that the gross method of accounting for cash discounts is used.
3. Repeat requirements 1 and 2 assuming that the net method of accounting for cash discounts is used.
(1)
Trade discount:
A trade discount is the reduction in price allowed by the manufacturer to the wholesalers when the products are purchased in large quantity.
Cash discount:
A cash discount is the reduction in the amount that is to be paid by the credit customers. It is usually allowed by the seller to buyer or customer, in order to motivate the customer to pay within a specified period of time. A cash discount is often referred as sales discount.
To prepare: The journal entry to record the sales and collection on November 17, 2018.
Explanation of Solution
- Sales Entry:
Compute the sales revenue:
Working notes:
Compute the list price of sales:
Record the journal entry:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
November 17, 2018 | Accounts Receivable | 42,000 | ||
Sales Revenue | 42,000 | |||
(To record the sales on account) |
Table (1)
- Collection Entry:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
November 26, 2018 | Cash (3) | 41,160 | ||
Sales Discount (2) | 840 | |||
Accounts Receivable | 42,000 | |||
(To record the sales remittance) |
Table (2)
The sale was made on November 17 and the payment is received on November 26 Hence, the customer is eligible for a sales discount of 2% (2/10 term).
Working note:
Compute the amount of discount:
Compute the amount of cash received from the customer:
(2)
To prepare: The journal entry to record the sales and collection assuming the payment was received on December 15, 2018.
Explanation of Solution
The journal entry to record the sales and collection assuming the payment was received on December 15, 2018 is prepared as follows:
- Sales Entry:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
November 17, 2018 | Accounts Receivable | 42,000 | ||
Sales Revenue | 42,000 | |||
(To record the sales on account) |
Table (3)
- Collection Entry:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 15, 2018 | Cash | 42,000 | ||
Accounts Receivable | 42,000 | |||
(To record the sales remittance) |
Table (4)
Explanation:
The sale was made on November 17 and the payment is received on December 15. Hence, the customer is not eligible for any sales discount. He has to pay the full amount.
(3)
Requirement 1 and 2 using net method:
Explanation of Solution
- Sales Entry:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
November 17, 2018 | Accounts Receivable | 41,160 | ||
Sales Revenue | 41,160 | |||
(To record the sales on account) |
Table (5)
- Collection Entry:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
November 26, 2018 | Cash | 41,160 | ||
Accounts Receivable | 41,160 | |||
(To record the sales remittance) |
Table (6)
The sale was made on November 17 and the payment is received on November 26. Hence, the customer is eligible for a sales discount of 2% (2/10 term).
- Sales Entry:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
November 17, 2018 | Accounts Receivable | 41,160 | ||
Sales Revenue | 41,160 | |||
(To record the sales on account) |
Table (7)
- Collection Entry:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 15, 2018 | Cash | 42,000 | ||
Accounts Receivable | 41,160 | |||
Interest Revenue | 840 | |||
(To record the sales remittance) |
Table (8)
The sale was made on November 17 and the payment is received on December 15. Hence, the customer is eligible for a sales discount of 2% (2/10 term). But he has to pay the interest for the same.
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