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E 7-5 Trade and cash discounts; the gross method and the net method compared LO7-3 Tracy Company, a manufacturer of air conditioners, sold 100 units to Thomas Company on November 17. 2024. The units have a list price of $600 each, but Thomas was given a 30% trade discount. The terms of the sale were 2/10,n/30. Required: 1. Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection on November 26, 2024, assuming that the gross method of accounting for cash discounts is used. 2. Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection on December 15, 2024, assuming that the gross method of accounting for cash discounts is used. 3. Repeat requirements 1 and 2 assuming that the net method of accounting for cash discounts is used.

1 Answer

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Final answer:

To record the sale and collection using the gross method, the journal entries would be different from using the net method. The gross method records sales at the full list price and recognizes the discount as a contra-revenue account, while the net method records sales at the net amount after deducting the discount. The collection entries would also differ based on the method used.

Step-by-step explanation:

To answer the given requirements, we need to understand the gross method and the net method of accounting for cash discounts. The gross method records sales at the full list price and recognizes the discount as a contra-revenue account. The net method records sales at the net amount after deducting the discount.

1. Journal entries using the gross method:

November 17, 2024:


  • Accounts Receivable - Thomas Company: $60,000 (100 units x $600)

  • Sales: $60,000

  • Sales Discount: $18,000 (30% of $60,000)

November 26, 2024 (collection):


  • Cash: $43,200 ($60,000 - $18,000)

  • Accounts Receivable - Thomas Company: $43,200



2. Journal entries using the gross method:

November 17, 2024:


  • Accounts Receivable - Thomas Company: $60,000

  • Sales: $60,000

  • Sales Discount: $18,000

December 15, 2024 (collection):


  • Cash: $42,000 ($60,000 - $18,000)

  • Accounts Receivable - Thomas Company: $42,000



3. Journal entries using the net method:

November 17, 2024:


  • Accounts Receivable - Thomas Company: $42,000 (net amount after deducting discount)

  • Sales Revenue: $42,000 (net amount after deducting discount)

November 26, 2024 (collection):


  • Cash: $42,000

  • Accounts Receivable - Thomas Company: $42,000



4. Journal entries using the net method:

November 17, 2024:


  • Accounts Receivable - Thomas Company: $42,000 (net amount after deducting discount)

  • Sales Revenue: $42,000 (net amount after deducting discount)

December 15, 2024 (collection):


  • Cash: $42,000

  • Accounts Receivable - Thomas Company: $42,000

User Damir Arh
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