Question

On January 1, Morris Company offered a customer a 10% trade discount if the customer purchases 1,000 units of an item within the next 6 months. Each item sells for $100. Based on the customer’s previous purchase history, Morris believes there is a 60% chance that the customer will purchase more than 1,000 units. On January 10, the customer purchases 200 units on credit. Required: How much revenue should Morris recognize related to this customer? Prepare the entry to record the sale on account on January 10.

Answer 1

The revenue will be recorded at $ 100 per unit of sale i.e at $ 20,000 ( 200 units * $ 100). The trade discount is yet not given to customer as he has not purchased 1000 units. It is probable that customer will purchase more than 1000 units in next 6 months. Since there is probability of giving discount then a provisioning entry is to be passed to record trade discount for 200 units sold on January 10. Provision for discount is to be provided for 10% of sales value at $ 2,000 ($ 20,000 * 10%)

Journal entries to be posted as under

Date	Accounts	Debit	Credit
January 10	Accounts Receivable	$        20,000
	To Sales		$       20,000
	(recorded sales made on credit)
January 10	Trade discount	$          2,000
	To Provision for Trade discount		$         2,000
	(recorded probable trade discount for sale made on January 10)