Question

Please do it by type not pics.

1.China Inc. sales rice to Wok This Way Inc. on account for $100,000. The terms of the sale are 3/10, n/30. China Inc. expects that Wok This Way Inc. will take the discount. Assume China Inc. uses the net method. What is the amount of sales discount debited when the payment is received in the discount period?

2.China Inc. sales rice to Wok This Way Inc. on account for $100,000. The terms of the sale are 3/10, n/30. China Inc. expects that Wok This Way Inc. will take the discount. Assume China Inc. uses the gross method. What is the amount of sales discount debited when the payment is received?

Answer 1

• Concept of Net Method and Gross Method of accounting.

--Gross Method

>Under this method, the sales are recorded (credited) at the ‘total’ amount, without deduction the discount amount.

>If payment is made WITHIN the discount period, the sales discount is debited by the amount of discount.

>If payment is made AFTER the discount period, no ‘sales discount’ is recorded(debited).

>Here, Sales discount is recorded at the TIME OF PAYMENT being received.

--Net Method

>Under this method, the sales are recorded (credited) at the ‘net’ amount, AFTER deducting the discount amount.

>If payment is made WITHIN the discount period, no recording of Sales discount is done, because Sales discount was already accounted for at the time of Sale.

>If payment is made AFTER the discount period, the ‘sales discount forfeited’ is credited by the discount amount.

>Here, Sales Discount is accounted for at the TIME OF SALE, BUT without debiting ‘Sales Discount’ separately. Sales are recorded after deducting discount amount.

• Based on above concept, following answers are provided:

Answer 1:

--No amount will be debited to Sales Discount under NET METHOD when the payment is received, because Sales discount is not debited separately at the time of Sales. Rather, Sales account is credited by the amount after deducting ‘discount’.

--The entries would have been:

Transaction	Accounts title	Debit	Credit
At the time of Sale	Accounts receivables	$          97,000.00
	Sales revenue		$        97,000.00
	(Sales made on account)
At time of receiving payment	Cash	$          97,000.00
	Accounts receivables		$        97,000.00
	(Payment received within discount period)

--Answer: Sales Discount accounts WILL NOT BE DEBITED in NET METHOD.

• Answer 2

--Sales Discount would be debited by $ 3,000 when payment is received under GROSS METHOD.

--Entries would be:

               

Transaction	Accounts title	Debit	Credit
At the time of Sale	Accounts receivables	$        100,000.00
	Sales revenue		$      100,000.00
	(Sales made on account)
At time of receiving payment	Cash	$          97,000.00
	Sales Discount	$             3,000.00
	Accounts receivables		100000
	(Payment received within discount term)

--Answer: Sales Discount would be debited by $ 3,000