Question

Merchandise costing $1,000 is sold for $2,000 on terms 2/30, n/60. If the customer pays within the discount period. Prepare the journal entries needed at (a) time of sale and (b) collection of payment from the customer, assuming the company uses a perpetual inventory system with the gross method of recording sales discounts.

Answer 1

(a) time of sale

Cost of Goods Sold $1,000 (debit)

Merchandise $1,000 (credit)

Being Recognition of Cost of Sale and De-recognition of Asset - Merchandise

Trade Receivable $2,000 (debit)

Revenue $2,000 (credit)

Being Recognition of Revenue and Asset - Trade Receivable

(b) collection of payment from the customer

Discount Allowed Expense $ 40 (debit)

Trade Receivable $ 40 (credit)

Being Recognition of a discount Allowed Against the Customer Account

Cash $ 1,960 (debit)

Trade Receivable $ 1,960 (credit)

Being recognition of Cash on receipt of Payment

Step-by-step explanation:

(a) time of sale

Recognize the Cost of Sales expense following this Sale since the Company uses a perpetual inventory system.

Also Recognize an asset Trade Receivable and Revenue following the Sale

(b) collection of payment from the customer

Recognise a discount Allowed Against the Customer Account

Also recognise Cash (Net of Discount Allowed) on receipt of Payment