Question

Gross and net methods for sales discounts The following were selected from among the transactions completed by Strong Retail Group during August of the current year: Aug. S. Sold merchandise on account to M. Quinn, $7,500, terms 2/10, 1/30. The cost of the merchandise sold was $4,200. 9. Sold merchandise on account to R. Busch., $4,000, terms 1/10, n/30. The cost of the merchandise sold was $2,100. 15. Received payment on account for the sale of August 5 less the discount 20. Sold merchandise on account to S. Mooney, $6,000, terms n/eom. The cost of the merchandise sold was $3,300. 25. Received payment on account for the sale of August 9. 31. Received payment on account for the sale of August 20. a. Journalize the August transactions using the gross method of recording sales discounts. If an amount box does not require an entry, leave it blank. Aug. 5 Accounts Receivable M. Quinn 7.500 ✓ Sales 7.500 Aug. 5 4,200 Cost of Merchandise Sold ✓ Merchandise Inventory ✓ 4,200 ✓ Aug. 9 Accounts Receivable R. Busch Sales ✓ 4,000 ✓ 4,000 Aug. 9 Cost of Merchandise Sold 2,100 ✓ Merchandise Inventory ✓ 2,100

Answer 1

Answer-c:

Total sales for august under Gross Method = $7,500 + 4,000 + 6,000 - 150 = $17,350

Total sales for august under Net Method = $7,350 + 3,960 + 6,000 = $17,310

Explanation:

(i) Under gross method, the sales transaction is recorded at gross price i.e., without deducting the amount of discount offered. Afterward, if buyer makes the payment within discount period, the seller allows him a discount according to the terms of sale but if he fails to make the payment within discount period then no discount is allowed to him.

The sales discount recognized under gross method is deducted from the gross sales revenue in the income statement.

(ii) Under net method, the sales are initially recorded with the net amount i.e., after deducting the amount of discount from the gross price. The accounts receivable account is debited and the sales account is credited with the net amount.

Sales discount forfeited recognized under net method appears as income in the “other revenues” section of the income statement.