Question

Tracy Company, a manufacturer of air conditioners, sold 125 units to Thomas Company on November 17, 2018. The units have a list price of $400 each, but Thomas was given a 20% trade discount. The terms of the sale were 3/10, 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-a. Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection on November 26, 2018, assuming that the net method of accounting for cash discounts is used.
3-b. Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection on December 15, 2018, assuming that the net method of accounting for cash discounts is used.
  

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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.

Rquired 1: - Record the sale of 125 units with a list price of $400, a 20% trade discount (if applicable), with terms of 3/10, n/30 under the gross method. - Record the cash collection on November 26.

Rquired 2: - Record the sale of 125 units with a list price of $400, a 20% trade discount (if applicable), with terms of 3/10, n/30 under the gross method. - Record the cash collection on December 15.

Requird 3a: Record the sale of 125 units with a list price of $400, a 20% trade discount (if applicable), with terms of 3/10, n/30 under the net method. - Record the cash collection on November 26.

Requird 3b: - Record the sale of 125 units with a list price of $400, a 20% trade discount (if applicable), with terms of 3/10, n/30 under the net method. - Record the cash collection on December 15.

Answer 1

• Under Gross Method, Sales are recorded at actual amount excluding any cash discount. If the customer pays within discount period, the cash discount is debited.
• Under Net Method, Sales are recorded as reduced by the ‘prospective’ Sales cash discount. If the customer pays within discount period, normal entry of cash received is passed. If not paid within discount period, Cash discount gets forfeited and credited at the time of receiving payment.
• Note:

Sales Value = 125 units x $400 = $50000
(Less) Trade discount of 20% = $10000
Sales made at [50000 – 10000] = $40000

• If customer pays within 10 days of Nov 17, he will get a cash discount of 3%, as the term was “3/10, n/10”. If paid within 10 days, cash received will be $38800 [40000 – (40000 x 3%)]
• Journal Entry 1: Gross method and payment received within discount period

	General Journal	Dr (in $)	Cr (in $)
17-Nov	Accounts receivables	40000
	Sales Revenue		40000
26-Nov	Cash	38800
	Sales Discount	1200
	Accounts receivables		40000

• Journal Entry 2: Gross Method & payment received after 10 days

	General Journal	Dr (in $)	Cr (in $)
17-Nov	Accounts receivables	40000
	Sales Revenue		40000
15-Dec	Cash	40000
	Accounts receivables		40000

• Journal Entry 3 (a): Net Method & payment received within 10 days

	General Journal	Dr (in $)	Cr (in $)
17-Nov	Accounts receivables	38800
	Sales Revenue		38800
26-Nov	Cash	38800
	Accounts receivables		38800

• Journal Entry 4: Net Method & payment received after 10 days

	General Journal	Dr (in $)	Cr (in $)
17-Nov	Accounts receivables	38800
	Sales Revenue		38800
15-Dec	Cash	40000
	Accounts receivables		38800
	Cash Discount forfeited		1200