Question

On March 17, Jackal Lumber sold building materials to Fredo Limited for $15,000 with terms of 3/10, net 20. What amount did Jackal record as revenue on March 25 when Fredo paid for the building materials

Answer 1

Answer:

$15,0000 is recorded as revenue

Explanation:

The amount of $15,000 is recorded as revenue immediately the sale is made on March 17. The Discount allowed of $300 (2%).

"3/10, Net 20" means Fredo will enjoy 2% discount if he pays within 10 days or pays in full within 20 days. The amount recorded in revenue will not change regardless of which option he chooses.

Answer 2

Answer:

Sales Account will be credited with $15,000 in the first instance, however this will be offset by a cash discount of $450 leaving a Net sales position of $14,550.

Explanation:

In business transactions, sellers offer some options to encourage early payment on credit sales as a boost to their cash flow.

To the Buyer it is also an incentive which drives up profitability as cost of goods produced or sold reduces but it takes cash away from the business, except these are idle cash which could not generate as much reward as offered by the seller.

In this case 3/10, net 20 means if the Buyer is able to pay up within 10days he earns the right to a 3% discount on invoice value else he is expected to pay up in full within 20 days.

Jackal lumber would recognize the following entries from the day Fredo Bought the goods (Mar 17)

Dr. Accounts receivables Account with $15,000

Cr. Sales Account with $15,000

On the 25th Mar when Fredo paid; because it falls within the 10/day credit period for cash discount, Fredo would only pay the net amount after offsetting 3% discount.

3% discount on $15,000 = $450.

The entries will be:

Dr. Cash with $14,550

Dr. Cash discount with $450

Cr. Accounts receivable Account with $15,000