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ysjd.patel
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Joined: 12 Jan 2009
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Posts: 179

Posted: 30 Mar 2009 at 19:37 \| IP Logged

The sales price of an item before trade and cash discounts is $50. A trade discount of 2% is available as well as a 4% cash discount. An allowance of $8 (based on the $50 price) is granted and payment remitted before the cash discount period ended. The amount remitted is:

ans: 39.51

I got this answer ....but can anyone give me its journal entry?

thanx

taxwoman
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Posted: 31 Mar 2009 at 08:21 \| IP Logged

Allowance accounts are normally contra-receivable accounts, but in this case I would treat the $8 as an additional trade discount, since it is taken off the list price, not the trade price.

Trade discounts are not recorded in the accounts. Cash discounts are recorded using either the gross method or the net method.

Gross method:

Dr. Accounts receivable $41.16
Cr. Sales $41.16

Dr. Cash $39.51
Dr. Sales discounts $1.65
Cr. Accounts receivable $41.16

Net method:

Dr. Accounts receivable $39.51
Cr. Sales $39.51

Dr. Cash $39.51
Cr. Accounts receivable $39.51

If you did want to use an allowance account for the $8 off list, you would have to convert it to $7.84 (98%) off trade, because accounts receivable are recorded at trade, not list (trade discounts are not shown in the accounts).

Gross Method:

Dr. Accounts receivable $49.00
Cr. Sales $49.00

Dr. Allowance for sales returns and allowances $7.84
Cr. Accounts receivable $7.84

Dr. Cash $39.51
Dr. Sales discounts $1.65
Cr. Accounts recievable $41.16

But as I said above, I think the allowance is acting more like a trade discount, so I would not record it.

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ysjd.patel
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Posted: 31 Mar 2009 at 09:37 \| IP Logged

thanx so much tax woman....:)

sanju06
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Joined: 23 Sep 2008
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Posted: 31 Mar 2009 at 13:09 \| IP Logged

Can anyone explain how the amount of $41.51 is arrived at? I am feeling kind of stupid to ask this:-(

Thanks

divyagovil1
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Joined: 30 Jan 2009
Location: India
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Posts: 1456

Posted: 31 Mar 2009 at 13:27 \| IP Logged

sanju06 wrote:

Can anyone explain how the amount of $41.51 is arrived at? I am feeling kind of stupid to ask this:-(

Thanks

even, i am confused... i thought cash discount would be on sales price after trade discount and allowance...

$41.16 * 4% = $1.65

final answer = cash recd = 41.16-1.65 = $39.51

I think there is a tyo error in the JEs....

Still, taxwoman, i say that you provided fabulous explanations.. Explaining the answer by way of JEs is the best way and leaves no scope for any further doubts :) Good work !!

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