Question

On December 28, 2021, Tristar Communications sold 10 units of its new satellite uplink system to various customers for $25,000 each. The terms of each sale were 1/10, n/30. Tristar uses the net method to account for sales discounts.In what year will income before tax be affected by discounts, assuming that all customers paid the net-of-discount amount on January 6, 2022?

Answer 1

Answer:

The income before tax will be affected by discounts in 2021.

Explanation:

The terms 1/10, n/30 imply that payment made within 10 days will enjoy 1% discount while full payment has to be made within 30 days if the payment was not made within 10 days.

Since it is assumed in the question that all customers paid the net-of-discount amount on January 6, 2022, that means they all paid within 10 days and enjoyed 1% discount. The anticipated discount allowed is calculated as follows:

Anticipated discount allowed = 1% * ($25,000 * 10) = 1% * $250,000 = $2,500

Since the sales was made on December 28, 2021, the anticipated discount allowed will reduce the 2021 income before tax by $2,500.

This is based on the Matching Concept which states that revenues and their related expenses must be recognized in the accounting period.

Therefore, the income before tax will be affected by discounts in 2021.