Question

Presented below are transactions related to Blossom Company.

 1. On December 3, Blossom Company sold $591,000 of merchandise on account to Sunland Co, terms 4/10,30, FOB shipping point. The cost of the merchandise sold was $354,400.

 2. On December 8, Sunland Co. was granted an allowance of $25.700 for merchandise purchased on December 3.

 3. On December 13, Blossom Company received the balance due from Sunland Co. 

Prepare the journal entries to record these transactions on the books of Blossom Company using a perpetual Inventory system. 

Assume that Blossom Company received the balance due from Sunland Co. on January 2 of the following year instead of December 13. Prepare the journal entry to record the receipt of payment on January 2.

Answer 1

The terms 4/10, n/30 means the following:

• 4/10 means: '4' indicates the discount percentage and '10' indicates the number of days from the date of invoice (December 3) within which buyer or Customer has to pay the amount owed to the seller or supplier to avail (or to qualify for) the discount of 4%.

• N/30 states that if the buyer or customer is not able to pay the invoice amount within 10 days to avail 4% discount, then the entire invoice amount is due within 30 days from the date of the invoice.

In this case, the payment is done within the discount period. So, Sunland Co. is eligible for a discount of 4%

.

No	Date	Account Titles and Explanation	Debit	Credit
1	Dec. 3	Accounts Receivable	$591,000
		Sales Revenue		$591,000
		(To record credit sale)
	Dec. 3	Cost of Goods Sold	$354,400
		Inventory		$354,400
		(To record cost of merchandise sold)
2	Dec. 8	Sales returns and Allowances	$25,700
		Accounts Receivable		$25,700
3	Dec. 13	Cash                                  [Cash received = Sales - Sales allowance - Sales discount = $591,000 - $25,700 - $22,612]	$542,688
		Sales discount                   [Amount receivable x 4% = (Sales - Sales allowance) x 4% = ($591,000 - 25,700) x 4%]	$22,612
		Accounts Receivable   [Amount receivable = Sales - Sales allowance]		$565,300

.

.

Jan. 2	Cash                                                        [Refer note below]	$565,300
	Accounts Receivable		$565,300

.

Note: Since the payment (from the buyer) is not done within the discount period which is 10 days from the date of sale (December 3), Sunland Co. (the buyer) is not eligible for the discount of 4%.