Question

Exercise 7-5 (Algo) Trade and cash discounts; the gross method and the net method compared (LO7-3] [The following information applies to the questions displayed below.] Tracy Company, a manufacturer of air conditioners, sold 125 units to Thomas Company on November 17, 2021. The units have a list price of $400 each, but Thomas was given a 20% trade discount. The terms of the sale were 3/10, n/30. Exercise 7-5 (Algo) Part - 1 Required: 1. Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection on November 26, 2021, 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, 2021, assuming that the gross method of accounting for cash discounts is used.

Answer 1

Requirement 1: (Gross method & Cash received within discount period)

Date	Account title and Explanation	Debit	Credit
Nov 17,2021	Accounts receivable	$40,000
	Sales revenue		$40,000
	[To record credit sales]
Nov 26,2021	Cash	$38,800
	Sales discount [40,000 x 3%]	$1,200
	Accounts receivable		$40,000
	[To record collections from customers]

Requirement 2: (Gross method & Cash received after discount period)

Date	Account title and Explanation	Debit	Credit
Nov 17,2021	Accounts receivable	$40,000
	Sales revenue		$40,000
	[To record credit sales]
Dec 15,2021	Cash	$40,000
	Accounts receivable		$40,000
	[To record collections from customers]

Calculations:

Sales revenue = 125 units x [$400 - ($400 x 20% trade discount)]

= 125 units x [$400 - $80]

= 125 units x $320

= $40,000