CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingEasy
A company sells goods to a customer on credit for $200,000 with terms 2/10, net 30. The customer is expected to take the discount. The company uses the net method to account for sales discounts. How much revenue should the company recognize at the point of sale?
- A$200,000
- B$196,000
- C$190,000
- D$198,000
Show answer & explanationAnswer & explanation
Correct answer: B. $196,000
Under the net method for sales discounts, revenue is initially recorded at the net amount (sales price less the expected discount). The sales price is $200,000, and the discount is 2% ($200,000 * 0.02 = $4,000). Therefore, the revenue recognized at the point of sale is $200,000 - $4,000 = $196,000.
Why the other options are wrong
- A. This would be the revenue recognized under the gross method, assuming the customer does not take the discount.
- C. Incorrect discount percentage applied.
- D. Incorrect calculation.
Net Method for Sales Discounts
Under the net method, accounts receivable and sales revenue are initially recorded at the sales price less any available cash discount. If the customer does not take the discount, the discount forfeited is recorded as 'Sales Discount Forfeited' or 'Interest Revenue'. This method assumes the customer will take the discount.
- Assumes customer will take discount
- Record A/R and Revenue at net amount
- If discount is not taken, record discount forfeited (e.g., Interest Revenue)
- Matches expected cash inflow
Memory trick: Gross is full price, Net is discounted, but then you might find it's forfeited.