Question

E 7-5 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.

Answer 1

Total Sales (100 units * $ 600 each)	$ 60,000
Less: 30% Trade discount	$ 18,000
Final Invoice price	$ 42,000

Under Gross method

As per Gross method company record sales at gross sales and when customer pay within limit then cash discount allowed.

1. If payment received on November, 26 (customer used cash discount)

Date	Account title	Debit	Credit
November,17	Account receivable	$ 42,000
	Sales		$ 42,000
	( Record for sales after trade discount)
November, 26	Cash	$ 41,160
	Sales Discount ( $ 42,000* 2%)	$      840
	Account receivable		$ 42,000
	( Payment received after 2% cash discount)

2. If payment received on December, 15

Date	Account title	Debit	Credit
November,17	Account receivable	$ 42,000
	Sales		$ 42,000
	( Record for sales after trade discount)
November, 26	Cash	$ 42,000
	Account receivable		$ 42,000
	( Payment received after 10 days)

Under Net method

As per Net method company record sales at net amount i.e. after cash discount but if customer will not pay within time period then company cash discount Sales discount forfeiture credited.

1. If payment received on December, 15

Net Amount = Gross Sales – Cash discount

                     = $ 42,000 - $ 840 ( $ 42,000*2 % )

                    = $ 41,160

1. If payment received on November, 26 (customer used cash discount)

Date	Account title	Debit	Credit
November,17	Account receivable	$ 41,160
	Sales		$ 41,160
	( Record for sales after cash discount)
November, 26	Cash	$ 41,160
	Account receivable		$ 41,160
	( Payment received within 10 days)

2. If payment received on December, 15

Date	Account title	Debit	Credit
November,17	Account receivable	$ 41,160
	Sales		$ 41,160
	( Record for sales after trade discount)
November, 26	Cash	$ 42,000
	Account receivable		$ 41,160
	Sales discount forfeiture		$      840
	( Payment received after 10 days)