Question

On July 1,Oura corp made a sale of $450,0000 to Stratus, INC. on account. Terms of the sales were 2/10, n 30. Stratus makes payment on July 29. Our uses the most likely amount method and assumes that the customer will take the discount when accounting for sales discounts. Ignore COGS and the reduction of inventory. a. prepare all Oura's journal entries b. what net sales does does Oura report? P.s. If someone could explain the difference between most likely amount method and expected value method I would greatly appreciate it.

Answer 1

• All working forms part of the answer
• Journal Entries on Jul 1 and on Jul 29: ANSWER

Date	Accounts title	Debit	Credit
01-Jul	Accounts receivables	$          4,410,000.00
	Sales Revenue		$          4,410,000.00
	(Sales recorded at amount net of discount)
29-Jul	Cash	$          4,410,000.00
	Accounts receivables		$          4,410,000.00
	(Cash received for the sale)

• The question says “ Oura uses most likely amount method and assumes that the customer will take the discount when accounting for sales discount”. This means that Oura records sales revenue using the “Net Method” of recording Sales.

Sales made is of $ 4,500,000 at 2% discount if amount paid within 10 days [2/10 = discount term]. Now, Oura assumes that the buyer will pay the amount before 10 days and hence records sales at $ 4,410,000 [4500000 – 2%].

• Net Sales reported by Oura = $ 4410000 [4500000 – 2%]
• Difference that you asked for between two concept:

--The above method is NET METHOD, which is asked in the question (and explained above).

--The other one is GROSS METHOD, where sales are recorded at total Sales revenue. If payment is made within discount term, a separate “Sales Discount” account is debited [a contra revenue account].

--If Gross Method would have followed, entries would have been [just for understanding purpose]:

Date	Accounts title	Debit	Credit
01-Jul	Accounts receivables	$      4,500,000.00
	Sales Revenue		$     4,500,000.00
	(Sales recorded at amount net of discount)
29-Jul	Cash	$      4,410,000.00
	Sales Discount	$            90,000.00
	Accounts receivables		$     4,500,000.00
	(Cash received for the sale)