Question

A customer of J and J purchased $2 million dollars of merchandise on account. J & J Products gives terms of 2%, 10 days, net 30. J& J Products believes that the customer will take the discount if is equal to at least an 16% return. J & J Products uses the net method to record sales. Assume a 360-day year.

Required:

a. How percentage return will be earned by the customer if they make the payment within the discount period?

b. Make the entries on J & J’s books assuming the customer pays within the discount period.

c. Make the entries on J & J’s books assuming the customer does not pay within the discount period.

d. Make the entries on the customer’s books assuming they payed within the discount period.

e. Make the entries on the customer’s books assuming they failed to pay within the discount period.

Answer 1

a. If Customer make the payment within the discount period of 10days , they will earn a return of 2%.

In the books of J & j's
b. If customer pays within the discount period.	Debit	Credit
Cash	$ 1,960,000.00
To Accounts Receivable		$ 1,960,000.00
(Customer has paid within the discount of 2% of 2 Million i.e $ 40,000)
c. If customer Does not pays within the discount period.	Debit	Credit
Cash	$ 2,000,000.00
To Accounts Receivable		$ 1,960,000.00
To Discount		$        40,000.00
(Customer has not paid within the discount period and already booked the discount is reversed

In the books of Customer
d. If Amount is paid within the discount period.	Debit	Credit
J & J (Account Payable)	$ 2,000,000.00
To Cash		$ 1,960,000.00
To Discount		$        40,000.00
Amount has paid within the discount period of 2% of 2 Million i.e $ 40,000. It is Assumed that customer does not follow Net Method to record Purchase
E. If Amount is not Paid within the discount period.	Debit	Credit
J & J (Account Payable)	$ 2,000,000.00
To Cash		$ 2,000,000.00
(Customer has not paid within the discount period , so full amount Is paid