Question

Jones Equipment is a private company that sells and installs HVAC systems. Jones offers payment terms of 2/10, n/30, where customers making payment within 10 days of installation will receive a discount of 2% off the purchase price or must pay the full balance due within 30 days. Jones has just received payment from a new customer who paid within the 10-day window and is thus entitled to the 2% discount. The gross sales price of the equipment and installation, before discount, was $10,000. This discount will not result in a loss to Jones on the sale of the product and service. Jones needs your help to determine when the 2% early-payment discount should be recognized and how it should be recorded—for example, as a reduction in revenue or as a cost of sales?

1. Show the approximate journal entries that Jones would make upon installation of the equipment and upon receipt of customer payment.

Answer 1

Solution: There are 2 types of method available to enter the journal entries. Gross and Net Methods.

Gross Method:

1) Under gross method, Jones Equipment will not consider any discount at the time of sale.

2) Discount will be consider as cost at the time of customer payment within the specified time

Sl no.	General Journal	Debit	Credit
1	Account Receivables	$           10,000.00
	Sales Revenue		$          10,000.00
	(Sales and installation of HVAC systems on account)
2	Cash	$             9,800.00
	Sales Discount (2%)	$                 200.00
	Account Receivables		$          10,000.00
	( Payment received and discount provided)

Net Method:

1) Under net method, Jones Equipment will consider 2%discount as trade discount at the time of sale

2)trade discount needs no entry.

3)trade discount is Reduction in sales revenue here.

4) Under this method, jones equipment is thinking that customer will pay his/her accounts with in the specific to avail discount

Sl no.	General Journal	Debit	Credit
1	Account Receivables	$             9,800.00
	Sales Revenue		$            9,800.00
	(Sales and installation of HVAC systems on account with trade discount of 2%)
2	Cash	$             9,800.00
	Account Receivables		$            9,800.00
	( Payment received )

Note: Jones Equipment need to take decision on which method to follow to record the journal entries.