Question

On February 3, Smart Company sold merchandise in the amount of $4,500 to Truman Company, with credit terms of 1/10, n/30. The cost of the items sold is $3,100. Smart uses the perpetual inventory system and the gross method. Truman pays the invoice on February 8, and takes the appropriate discount. The journal entry that Smart makes on February 8 is:

Multiple Choice

• Cash	3,100
  Accounts receivable		3,100

• Cash	4,500
  Accounts receivable		4,500

• Cash	4,420
  Sales discounts	31
  Accounts receivable		4,451

• Cash	3,020
  Accounts receivable		3,020

• Cash	4,455
  Sales discounts	45
  Accounts receivable		4,500

Answer 1

On February 3, Smart Company will record the following entries:
Date	Account Title	Debit ($)	Credit ($)	Explanation
Feb-03	Accounts Receivable a/c … Dr	$4,500		Since the sale is made on credit, Accounts receivable a/c is debited
	To Sales a/c		$4,500	Since the gross method is followed, the sales are recorded without recording any discount i.e. $4,500
	(Being sales to Truman Company on credit recorded)
Feb-03	Cost of goods sold a/c … Dr	$3,100		Expenses are to debited and cost of goods sold is an expense.
	To Merchandise Inventory a/c		$3,100	Since the inventory is being sold, merchandise inventory a/c is credited to record a reduction in the inventory.
	(Being cost of goods recorded on sales made)
Now, if Truman Company makes the payment for the sale on February 8, it will be eligible for a 1% discount.
On February 8, following journal entries will be recorded:
Date	Account Title	Debit ($)	Credit ($)	Explanation
Feb-08	Cash a/c .. Dr ($4,500 x 99%)	$4,455		Since cash is collected, cash a/c is debited
	Sales discounts a/c .. Dr ($4,500 x 1%)	$45		Discount is an expense hence debited
	To Accounts Receivable a/c		$4,500	The existing balance of $4,500 of Accounts Receivable is now credited with the same amount upon collections.
	(Being collections from Accounts receivable recorded)
Hence, the last option is the correct answer.