Chapter 7, Problem 7.5E

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 journal entries to record the sale on November 17 (ignore cost of goods) and collection on November 26, 2018, assuming that the gross method of accounting for cash discounts is used.

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.

To determine

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:

$\begin{array}{c}\text{ Sales Revenue=List Price of Sales (1)}-\text{Trade Discount}\\ \text{=\$60,000}-\left(\text{\$60,000×30\%}\right)\\ \text{=\$60,000}-\text{\$18,000}\\ \text{=\$42,000}\end{array}$

Working notes:

Compute the list price of sales:

$\begin{array}{c}\text{List Price of Sales}=\text{Number of Units Sold}\times \text{List Price of Each Unit}\\ =\text{100 Units}\times \text{\$600}\\ =\text{\$60,000}\end{array}$ (1)

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:

$\begin{array}{c}\text{Sales Discount}=\text{Amount}\text{Due}\times \text{Rate of Discount}\\ =\text{\$42,000}\times \text{2\% }\\ =\$840\end{array}$ (2)

Compute the amount of cash received from the customer:

$\begin{array}{c}\text{Cash Received}=\left(\text{Invoice Price}-\text{Sales Discount}\right)\\ =\left(\text{\$42,000}-\$840\right)\\ =\$41,160\end{array}$ (3)

To determine

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.

To determine

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.