Question

Harwell Company manufactures automobile tires. On July 15, 2018, the company sold 1,400 tires to the Nixon Car Company for $40 each. The terms of the sale were 3/10, n/30. Harwell uses the gross method of accounting for cash discounts.

Required:

1. Prepare the journal entries to record the sale on July 15 (ignore cost of goods) and collection on July 23, 2018.
2. Prepare the journal entries to record the sale on July 15 (ignore cost of goods) and collection on August 15, 2018.

Answer 1

Solution:

Under the gross method, the purchases/sales are recorded at its cost/sales price without reducing the amount of probable purchase/cash discount. Later on when the company pays/receives within the terms of availing cash discount, the discount is recorded separately in the entry on the date of payment done.

Part 1 --- Journal entries to record the sale on July 15 and collection on July 23, 2018.

Date	Accounts	Debit	Credit
July.15, 2018	Accounts Receivable	$56,000
	Sales Revenue (1400 tires x $40 each)		$56,000
July.23, 2018	Cash (56,000*97%)	$54,320
	Cash Discount (56,000*3%) (Note 1)	$1,680
	Accounts Receivable		$56,000

Note 1 --- Since the company receives payment within the discounting period i.e. within 10 days from the date of sale, the Nixon Car Company is entitled for availing cash discount.

Part 2 --- Journal entries to record the sale on July 15 and collection on August 15, 2018.

Date	Accounts	Debit	Credit
July.15, 2018	Accounts Receivable	$56,000
	Sales Revenue (1400 tires x $40 each)		$56,000
July.23, 2018	Cash	$56,000
	Accounts Receivable		$56,000

Note 1 --- Since the company receives payment after the discounting period i.e. after 10 days from the date of sale, the Nixon Car Company is not entitled for availing cash discount, hence Nixon Car Company will pay full amount of sale value.