Question

On July 1, Ruth Co. sold inventory costing $9,000 to Diana, Inc. for $12,000, terms 2/10, n/30. Both companies use the net method to account for sales discounts. If Diana pays within the discount period, what journal entry will be recorded by Ruth Company when payment is received?

• Debit Cash for $11,760 and credit Accounts Receivable for $11,760.

• Debit Cash for $11,760, debit Sales Revenue for $240 and credit Accounts Receivable for $12,000.

• Debit Cash for $12,000 and credit Accounts Receivable for $12,000.

• Debit Accounts Payable for $12,000, credit Cash for $11,760 and credit Inventory for $240.

Answer 1

Solution

Ruth Co

The correct entry to be recorded when payment is received under the net method is as follows,

Account Titles and Explanation	Ref. No.	Debit	Credit
Cash		$11,760
Accounts Receivable			$11,760
(To record payment received under net method)

Computation:

Discounted invoice amount is calculated as follows,

Invoice amount = $12,000

Discount on payment within the discount period of 10 days is 2%,

Cash discount = 12,000 x 2% = $240

Discounted Invoice Amount = 12,000 x 98% = $11,760

Explanation:

The net method assumes prompt payment by customer to avail the cash discount. Hence, sale is recorded as discounted invoice amount and once cash payment is received within the discount period the above entry is posted.

The company would have posted the following entry on the date of sale as follows,

Account Titles and Explanation	Ref. No.	Debit	Credit
Accounts Receivable		$11,760
Sales Revenue			$11,760
To record sale at net method)