Question

On October 7, Monty Company sold merchandise to a customer for $1,200 with credit terms of 2/10, n/30. The cost of the merchandise is $800. On October 10, Monty granted the customer a $100 allowance on the merchandise the customer purchased on October 7. In the October 10 journal entry, Monty will:

Debit Merchandise Inventory $100; credit Cost of Goods Sold $100

Debit Merchandise Inventory $100; credit Sales Returns and Allowances $100

Debit Sales Returns and Allowance $100; credit Accounts Receivable $100

Debit Sales Discounts $100; credit Accounts Receivable $100

Answer 1

The right option is 4th - " Debit sales Discounts $100; credit Accounts Receivable $100".

As the customer is allowed an allowance on the merchandise purchased by him, this means that he will now have to pay less amount. Further, this means that Monty Company will have to reduce the total amount of accounts receivable from customers by $100. As Accounts receivable have to debited to increase their amount, therefore, to decrease their balance they have to credited.
This makes the first two options incorrect.
Now, this allowance is not sales returns as Monty has granted the customer an allowance.
Therefore, the right option is 4th - where the sales discounts has been debited.