Question

On July 22, Peter sold $15,500 of inventory items on credit with the terms 2/15, net 30. Payment on $10,000 sales was received on August 1 and the remaining payment was received on August 12. Assuming Peter uses the gross method of accounting for sales discounts, which one of the following entries was made on August 1 to record the cash received?
a. Cash 9,800
Sales Discount 200
Accounts Receivable 10,000
b. Cash 10,000
Accounts Receivable 10,000
c. Cash 9,800
Accounts Receivable 9,800
d. Accounts Receivable 200
Sales Discount Forfeited 200

Answer 1

Answer:

b. Cash 10,000

Accounts Receivable 10,000

Explanation:

In gross method of accounting the transactions are recorded by gross amount rather value net of discount. This method assumes that customer will not take any early payment discount.

Under gross method of accounting the cash will be debited by the whole amount paid on August 1, even the payment is made in discount period and account receivable will be credited by the $10,000.

Answer 2

Answer:

A)

Dr Cash 9,800

Dr Sales Discount 200

    Cr Accounts Receivable 10,000

Explanation:

The gross method records the invoice at full price (accounts receivable $15,500) and if any discounts are made, the sales discount account is used.

July 22, merchandise sold terms 2/15, net 30

Dr Accounts receivable 15,500

    Cr Sales revenue 15,500

August 1, partial payment collected

Dr Cash 9,800

Dr Sales discount 200

    Cr Accounts receivable 10,000

August 12, invoice paid at full

Dr Cash 5,500

    Cr Accounts receivable 5,500

*Sales discount is a contra revenue account.