Question

E7-5.   

(Recording Sales Gross and Net)

(LO 2) On June 3, Arnold Company sold to Chester Company merchandise having a sale price of $3,000 with terms of 2/10, n/60, f.o.b. shipping point. An invoice totaling $90, terms n/30, was received by Chester on June 8 from John Booth Transport Service for the freight cost (hint: remember, you are recording the entries for Arnold Company and the sale was made f.o.b. shipping point -buyer pays freight and - you are the seller, so this is between Chester Company and John Booth Transport Services, extra information!). On June 12, the company received a check for the balance due from Chester Company.

Instructions

(a)  

Prepare journal entries on the Arnold Company books to record all the events noted above under each of the following bases.

• 1.Sales and receivables are entered at gross selling price.
• 2.Sales and receivables are entered at net of cash discounts.

(b)  

Prepare the journal entry for both 1 and 2, assuming that Chester Company did not remit payment until July 29.

Answer 1

Answer (a).

1.Sales and receivables are entered at the gross selling price.

Date	General Journal	Debit	Credit
June 3	Accounts Receivable	3,000
	Sales Revenue		3,000
	(To record sales revenue)
June 12	Cash	2,940
	Sales Discounts (3,000 * 2 %)	60
	Accounts Receivable		3,000
	(To record payment received from Chester Company)

2.Sales and receivables are entered at net of cash discounts

Date	General Journal	Debit	Credit
June 3	Accounts Receivable	2,940
	Sales Revenue (3,000 * 98 %)		2,940
	(To record sales revenue)
June 12	Cash	2,940
	Accounts Receivable		2,940
	(To record payment received from Chester Company)

Answer (b).

The journal entry under basis 1, assuming that Chester Company did not remit payment until July 29

Date	General Journal	Debit	Credit
July 29	Cash	3,000
	Accounts Receivable		3,000
	(To record payment received from Chester Company)

The journal entry under basis 2, assuming that Chester Company did not remit payment until July 29

Date	General Journal	Debit	Credit
July 29	Cash	3,000
	Accounts Receivable		2,940
	Sales Discounts Forfeited		60
	(To record payment received from Chester Company)