Tracy Company, a manufacturer of air conditioners, sold 100 unis to Thomas Compa

Question

Tracy Company, a manufacturer of air conditioners, sold 100 unis to Thomas Company on November 17 2016. The units have a list price of S600 each, but Thomas was given a 30% trade discount. The terms of the sale were 2/10, n/30 3.1 Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection on November 26, 2016, assuming that the net method of accounting for cash discounts is used. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Explanation / Answer

Gross invoice value = 600 * 100 units = 60000

Trade discount = 60000 * 30% = 18000.

Invoice value ( net of trade discount ) = 60000 - 18000 = 42000

Under net method of accounting for cash discounts, even the 2% of cash discount for payments within 10 days are also deducted while recording the sales revenue entry itself. That means entity assumes that all customers in general pay within the stipulated period and takes the advantage of the discounts.

Hence revenue to be recorded = 42000 - 42000 * 0.02 = 41160

To record sales on November 17 Debit Credit Accounts receivables a/c 41160 Sales revenue a/c 41160 To record collection on November 26 Cash a/c 41160 Accounts receivables a/c 41160

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