Final answer:
To record an early settlement discount by Tallinn Ltd for a purchase from Oslo Ltd, the journal entry would include a debit to accounts payable for the full invoice amount, a credit to cash for the post-discount payment amount, and a debit to purchase discounts for the discount amount.
Step-by-step explanation:
When Tallinn Ltd makes the decision to take advantage of the early settlement discount with Oslo Ltd, the accounting records must reflect the discount received. Typically, when a purchase on credit is made, Tallinn Ltd would debit inventory (or the relevant expense account) and credit accounts payable. However, with the decision to take the discount, the double-entry for payment will include an additional account to record the discount.
The journal entry to record the discounted payment would be a debit to accounts payable for the full invoice amount, a credit to cash for the amount of payment after the discount, and a debit to purchase discounts (which may alternatively be named 'discounts received' or a similar term in the ledger) for the amount of the discount taken. This reflects the reduction in both the liability and the cash paid, and records the discount as a reduction of the expense or cost that was originally recorded.
For example, if Tallinn Ltd has a $1,000 invoice and the early payment discount is 2%, the double-entry would be a debit to accounts payable for $1,000, a credit to cash for $980, and a debit to purchase discounts for $20.