Question

Be prepared to show how to record the journal entries for the following transactions and explain how they were prepared.

a) XYZ Co. sold merchandise to a customer for $1,000 less a trade discount of $100. The credit terms for the sale were 2/10 net/30. They use the gross method for cash discounts.

b) Five days after the sale, the customer returns 10% of the shipment.

c) Seven days after the sale, XYZ draws up a financial statement and estimates that there will be an additional return of 5% of the shipment.

d) Ten days after the sale, the customer pays the balance due less the 10% cash discount.

Answer 1

Before beginning let me highlight few points:

1. Invoice values is net of Trade Discount.

2. 2/10 net/30 means the normal credit period is 30 days and if the customer pays with 10 days they will get 2% discount. However in the last point it is mentioned that cash discount of 10% was given so we will answer accordingly.

3. In gross method, Cash discount is not recoded in the beginning, that is the sales is recorded at invoice value and when in future the money is received as per the terms of sale the discount is recorded.

The following entries need to be passed:

	Journal Entries
Date	Particulars	Debit $	Credit $
a.	Accounts Receivable A/C - Dr	900
	Sales A/C		900
	(sold merchandise of $ 1000 less $100 trade discount under 2/10 net/30 terms)
b.	Sales Return A/C - Dr	90
	Account Receivables A/C		90
	(10% of the above shipment returned by customer)
c.	Sales Return A/C - Dr	45
	Allowance for Sales Return A/C		45
	(5% of shipments is estimated to be returned)
d.	Cash A/C - Dr	729
	Cash Discount A/C - Dr	81
	Accounts Receivables A/C		810
	(balance due from customer received at 10% cash discount)
e.	Allowance for Sales Return A/C - Dr	45
	Sales Return A/C		45
	(since no return was done the allowance is reversed)
f.	Sales A/C -Dr	90
	Sales Return A/C		90
	(sales return adjusted finally with sales to reduce sales)

Please feel free to comment if you need any changes in the answer or any further explaination for the question.