Question

New black company sells merchandise on account for 1,800 to diamond company with credit terms of 2/10, n/30. diamond company returns 600 of damaged merchandise along with a check to settle the account within the discount period. To record the return and receipt of the check simultaneously by new black company, what will the tabular analysis show?

1) Increase in accounts receivable and decrease in cash
2) Decrease in accounts receivable and decrease in cash
3) Increase in accounts receivable and increase in cash
4) Decrease in accounts receivable and increase in cash

Answer 1

The tabular analysis will show a decrease in accounts receivable by $1,200 and an increase in cash by $1,176 when New Black Company records the return of damaged merchandise and receipt of the settlement check within the discount period from Diamond Company.

Step-by-step explanation:

When New Black Company sells merchandise on account to Diamond Company with credit terms of 2/10, n/30, and Diamond Company returns part of the merchandise, it reduces the receivable amount owed to New Black Company. The initial sale was for $1,800, and with Diamond Company returning $600 of damaged merchandise, the new receivable amount is $1,200.

Since the payment is made within the discount period, Diamond Company is entitled to a 2% discount on this amount. Thus, the payment amount becomes 98% of $1,200, which is $1,176. The tabular analysis would show a decrease in accounts receivable by $1,200 (the $600 return plus the $600 remaining balance after discount) and a increase in cash by $1,176, the amount of the check received after the discount.